Diversification and the Banks' Risk-Return-Characteristics: Evidence from Loan Portfolios of German Banks

44 Pages Posted: 8 Jun 2016

See all articles by Andreas Behr

Andreas Behr

University of Muenster - Faculty of Economics

Andreas Kamp

University of Muenster - Finance Center

Christoph Memmel

Deutsche Bundesbank

Andreas Pfingsten

University of Münster - Finance Center Münster

Multiple version iconThere are 2 versions of this paper

Date Written: 2007

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.

Keywords: bank lending, loan portfolio, portfolio theory, diversification, riskreturn analysis

JEL Classification: G21, C43, C23, G11

Suggested Citation

Behr, Andreas and Kamp, Andreas and Memmel, Christoph and Pfingsten, Andreas, Diversification and the Banks' Risk-Return-Characteristics: Evidence from Loan Portfolios of German Banks (2007). Bundesbank Series 2 Discussion Paper No. 2007,05. Available at SSRN: https://ssrn.com/abstract=2793990

Andreas Behr (Contact Author)

University of Muenster - Faculty of Economics ( email )

Universitätsstr. 14-16
48143 Munster
Germany

Andreas Kamp

University of Muenster - Finance Center ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany

Christoph Memmel

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Andreas Pfingsten

University of Münster - Finance Center Münster ( email )

Universitätsstr. 14-16
Muenster, D-48143
Germany

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