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Generalists and specialists in the credit market

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  • Fricke, Daniel
  • Roukny, Tarik

Abstract

In this paper, we propose a method to analyze the structure of the credit market. Using historical data from Japan, we explore banks’ lending patterns to the real economy. We find that generalist banks (with diversified lending) and specialist banks (with focused lending) coexist, and tend to stick to their strategies over time. Similarly, we also document the coexistence of generalist and specialist industries (based on their borrowing patterns). The observed interaction patterns in the credit market indicate a strong overlap in banks’ loan portfolios, mainly due to specialist banks focusing their investments on the very same generalist industries. A stylized model matches these patterns and allows us to identify economically meaningful sets of generalist banks/industries. Lastly, we find that generalist banks are not necessarily less vulnerable to shocks compared to specialists. In fact, high leverage levels can undo the benefits of diversification.

Suggested Citation

  • Fricke, Daniel & Roukny, Tarik, 2020. "Generalists and specialists in the credit market," LSE Research Online Documents on Economics 87749, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:87749
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    File URL: http://eprints.lse.ac.uk/87749/
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    More about this item

    Keywords

    bank lending; portfolio theory; fire sale; diversification; systemic risk;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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