Why Do Specialized Banks Succeed? An Empirical Investigation of the Credit Business of Cooperative and Savings Banks
28 Pages Posted: 28 Feb 2008
Date Written: February 26, 2008
There is empirical evidence that specialization in lending leads on average to lower loan loss provisions and a higher profitability. In this paper we examine whether a better monitoring quality and/or lending to industries with lower loss rates are able to explain these results.
The main results are as follows: Specialized banks show a lower ratio of actual to expected losses, i.e. they possess a higher monitoring quality than diversified banks. Specialized cooperative banks particularly lend to low-risk industries. The level of specialization has a stronger explanatory content with respect to the monitoring quality than monitoring expenses.
Keywords: bank lending, loan portfolio, diversification, expected loss, savings banks, cooperative banks
JEL Classification: G11, G21
Suggested Citation: Suggested Citation