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Title:Diversification and the banks' risk-return-characteristics: evidence from loan portfolios of German banks PDF Logo
Authors:Behr, Andreas
Kamp, Andreas
Memmel, Christoph
Pfingsten, Andreas
Issue Date:2007
Series/Report no.:Discussion Paper, Series 2: Banking and Financial Supervision 2007,05
Abstract:Banks face a tradeoff between diversifying and focusing their loan portfolio. In this paper we carry out an empirical study for the German market to shed light on the question whether or not the benefits of risk sharing outweigh those of specialization. We use data from the Bundesbank's quarterly borrowers statistic to determine the degree of diversification in the banks' loan portfolios and combine this data with the banks' balance sheets and audit reports. The unique database comprises data from all German banks during the period from 1993 to 2003. Our main results can be summarized in three statements: i) Specialized banks have a slightly higher return than diversified banks. ii) Specialized banks have lower relative loan loss provisions and lower shares of non-performing loans, iii) However, the standard deviations of the loan loss provision ratio and the non-performing loan ratio are lower for diversified banks.
Subjects:bank lending
loan portfolio
portfolio theory
diversification
riskreturn analysis
JEL:G21
C43
C23
G11
Document Type:Working Paper
Appears in Collections:Discussion Paper Series 2: Banking and Financial Studies, Deutsche Bundesbank

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