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

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

Abstract

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

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    Cited by:

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    4. Busch, Ramona & Koziol, Philipp & Mitrovic, Marc, 2018. "Many a little makes a mickle: Stress testing small and medium-sized German banks," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 237-253.
    5. Müller, Isabella, 2020. "Trade shocks, credit reallocation and the role of specialisation: Evidence from syndicated lending," IWH Discussion Papers 15/2020, Halle Institute for Economic Research (IWH).

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    More about this item

    Keywords

    loan portfolio; credit risk; loan losses; concentration;
    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
    • 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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