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The Effects of Loan Portfolio Concentration on Brazilian Banks' Return and Risk

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Listed:
  • Benjamin M. Tabak
  • Dimas M. Fazio
  • Daniel O. Cajueiro

Abstract

This paper tests whether diversification of the credit portfolio at the bank level is associated to better performance and lower risk. We employ a new high frequency (monthly) panel data constructed for the Brazilian banking system with information at the bank level for loans by economic sector. We find that loan portfolio concentration increases returns and also reduces default risk; there are significant size effects; foreign and public banks seem to be less affected by the degree of diversification. An important additional finding is that there is an increasing concentration trend after the breakout of the recent international financial crisis, especially after the failure of Lehman Brothers.

Suggested Citation

  • Benjamin M. Tabak & Dimas M. Fazio & Daniel O. Cajueiro, 2010. "The Effects of Loan Portfolio Concentration on Brazilian Banks' Return and Risk," Working Papers Series 215, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:215
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    References listed on IDEAS

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