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Banks' concentration versus diversification in the loan portfolio: New evidence from Germany


  • Jahn, Nadya
  • Memmel, Christoph
  • Pfingsten, Andreas


Using a unique data set on German banks' sector specific loan exposures to the real economy and the corresponding write-offs and write-downs, we examine the impact of loan portfolio sector concentration on credit risk. By controlling for common risk factors, we separate the bank-specific selection and monitoring abilities from the composition of the loan portfolio. In our empirical study for the period 2003-2011, we find that (a) banks which are specialized in certain industries have, on average, lower loan losses, (b) the loss rate of a given industry in a bank's loan portfolio is lower if the bank has major exposures to this industry, and (c) the standard deviation of the loan losses is lower in the case of more focused banks.

Suggested Citation

  • 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.
  • Handle: RePEc:zbw:bubdps:532013

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    References listed on IDEAS

    1. Memmel, Christoph & Gündüz, Yalin & Raupach, Peter, 2015. "The common drivers of default risk," Journal of Financial Stability, Elsevier, vol. 16(C), pages 232-247.
    2. Mark Carey & Mitch Post & Steven A. Sharpe, 1998. "Does Corporate Lending by Banks and Finance Companies Differ? Evidence on Specialization in Private Debt Contracting," Journal of Finance, American Finance Association, vol. 53(3), pages 845-878, June.
    3. Evelyn Hayden & Daniel Porath & Natalja Westernhagen, 2007. "Does Diversification Improve the Performance of German Banks? Evidence from Individual Bank Loan Portfolios," Journal of Financial Services Research, Springer;Western Finance Association, vol. 32(3), pages 123-140, December.
    4. Ricardo Bebczuk & Arturo Galindo, 2007. "Financial crisis and sectoral diversification of Argentine banks, 1999-2004," Applied Financial Economics, Taylor & Francis Journals, vol. 18(3), pages 199-211.
    5. 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.
    6. Rossi, Stefania P.S. & Schwaiger, Markus S. & Winkler, Gerhard, 2009. "How loan portfolio diversification affects risk, efficiency and capitalization: A managerial behavior model for Austrian banks," Journal of Banking & Finance, Elsevier, vol. 33(12), pages 2218-2226, December.
    7. Mario Quagliariello, 2007. "Banks' riskiness over the business cycle: a panel analysis on Italian intermediaries," Applied Financial Economics, Taylor & Francis Journals, vol. 17(2), pages 119-138.
    8. Behr, Andreas & Kamp, Andreas & Memmel, Christoph & Pfingsten, Andreas, 2007. "Diversification and the banks' risk-return-characteristics: evidence from loan portfolios of German banks," Discussion Paper Series 2: Banking and Financial Studies 2007,05, Deutsche Bundesbank.
    9. 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.
    10. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    11. Sharpe, Steven A, 1990. " Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships," Journal of Finance, American Finance Association, vol. 45(4), pages 1069-1087, September.
    12. Böve, Rolf & Düllmann, Klaus & Pfingsten, Andreas, 2010. "Do specialization benefits outweigh concentration risks in credit portfolios of German banks?," Discussion Paper Series 2: Banking and Financial Studies 2010,10, Deutsche Bundesbank.
    13. Dennis, Steven & Nandy, Debarshi & Sharpe, Lan G., 2000. "The Determinants of Contract Terms in Bank Revolving Credit Agreements," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(01), pages 87-110, March.
    14. Thomas C. Wilson, 1998. "Portfolio credit risk," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 71-82.
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    More about this item


    loan portfolio; credit risk; loan losses; concentration;

    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
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation


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