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Do banks diversify loan portfolios? A tentative answer based on individual bank loan portfolios

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  • Kamp, Andreas
  • Pfingsten, Andreas
  • Porath, Daniel

Abstract

Theory of financial intermediation gives contradicting answers to the question whether banks should diversify or focus their loan portfolios. Our aim is to find out which of the two strategies is predominant in the German banking market. To this end we measure diversification for all German banks in the period from 1993 to 2002. As measures we use a broad set of heuristic approaches which capture the deviation of a bank's portfolio from a specified benchmark. Conceivable benchmarks are naive diversification across all industries or, alternatively, the economy's industry structure. With this framework our analysis comprises the widespread measures of concentration, like the Hirschman-Herfindahl index, but also the less known and in this context innovative group of distance measures. We find that different statistical measures of diversification may indicate contradicting results on the individual bank level. Since distance measures are more appealing from a theoretical point of view, the common practice to rely on measures of concentration only in the debate about diversification and focus, may be misleading. We further find that, despite these differences on the individual bank level, both approaches reveal that the majority of banks significantly increased loan portfolio diversification over the last decade. This tendency is especially driven by the large number of credit cooperatives and savings banks. However, some banks (especially regional banks and subsidiaries of foreign banks) reveal a strategy that seems to be more focused on certain industries.

Suggested Citation

  • Kamp, Andreas & Pfingsten, Andreas & Porath, Daniel, 2005. "Do banks diversify loan portfolios? A tentative answer based on individual bank loan portfolios," Discussion Paper Series 2: Banking and Financial Studies 2005,03, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdp2:4258
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    References listed on IDEAS

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    1. Falko Fecht & Kevin X. D. Huang & Antoine Martin, 2008. "Financial Intermediaries, Markets, and Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(4), pages 701-720, June.
    2. Hamerle, Alfred & Liebig, Thilo & Scheule, Harald, 2004. "Forecasting Credit Portfolio Risk," Discussion Paper Series 2: Banking and Financial Studies 2004,01, Deutsche Bundesbank.
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    Cited by:

    1. Jahn, Nadya & Memmel, Christoph & Pfingsten, Andreas, 2013. "Banks' concentration versus diversification in the loan portfolio: New evidence from Germany," Discussion Papers 53/2013, Deutsche Bundesbank.
    2. Tabak, Benjamin M. & Fazio, Dimas M. & Cajueiro, Daniel O., 2011. "The effects of loan portfolio concentration on Brazilian banks' return and risk," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 3065-3076, November.
    3. Nadya Jahn & Christoph Memmel & Andreas Pfingsten, 2016. "Banks’ Specialization versus Diversification in the Loan Portfolio," Schmalenbach Business Review, Springer;Schmalenbach-Gesellschaft, vol. 17(1), pages 25-48, April.

    More about this item

    Keywords

    bank lending; loan portfolio; portfolio theory; diversification; concentration measures; distance measures; focus;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation

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