Diversification, Size and Risk at Spanish Banks

WP EFMA Athens 2000

14 Pages Posted: 21 Jun 2000

See all articles by Fernando Gascón

Fernando Gascón

Universidad de Oviedo - Facultad de Economicas

Victor González

Universidad de Oviedo - Business Administration

Date Written: June 2000

Abstract

This paper tests whether large publicly traded banks are better diversified than small publicly traded banks. Our analysis is based on those Spanish publicly traded banks, from January 1988 to December 1997, for which we could retrieve both market return data and data from bank financial statements. Firstly, we create a diversification index by scaling systematic risk by stock return variance. Banks with a high diversification index, those with a high return-generating model R2, will have a small fraction of firm-specific risk. The second approach is based on the estimation of the conditional relationship between firm-specific risk on size and a vector of portfolio components related to both size and risk. Both approaches show a positive relationship between diversification and bank size. The riskiness of the assets and liabilities held by individual banks affect their individual stock return variance. The diversification potential at large banks is offset by their larger non-systematic risk. In this sense, larger banks are more diversified, and at the same time, invest in riskier activities.

Keywords: Diversification, size, bank risk

JEL Classification: G21

Suggested Citation

Gascón, Fernando and González Méndez, Víctor M., Diversification, Size and Risk at Spanish Banks (June 2000). WP EFMA Athens 2000. Available at SSRN: https://ssrn.com/abstract=233656 or http://dx.doi.org/10.2139/ssrn.233656

Fernando Gascón (Contact Author)

Universidad de Oviedo - Facultad de Economicas ( email )

Campus del Cristo, s/n
Oviedo, Asturias 33071
Spain
+34985103701 (Phone)
+34985103708 (Fax)

Víctor M. González Méndez

Universidad de Oviedo - Business Administration ( email )

Avenida del Cristo s/n
33071-Oviedo
Asturias
Spain
+34 985102826 (Phone)
+34 985103708 (Fax)

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