Do Specialization Benefits Outweigh Concentration Risks in Credit Portfolios of German Banks?

60 Pages Posted: 8 Jun 2016

See all articles by Rolf Böve

Rolf Böve

University of Muenster - Finance Center Muenster

Klaus Duellmann

Deutsche Bundesbank

Andreas Pfingsten

University of Münster - Finance Center Münster

Date Written: 2010

Abstract

Lending specialization on certain industry sectors can have opposing effects on monitoring (including screening) abilities and on the sectoral concentration risk of a credit portfolio. In this paper, we examine in the first part if monitoring abilities of German cooperative banks and savings banks increase with their specialization on certain industry sectors. We observe that sectoral specialization generally entails better monitoring quality, particularly in the case of the cooperative banks. In the second part we measure the overall effect of better monitoring and the associated higher sectoral credit concentrations on the credit risk of the portfolio. Our empirical results suggest that specialization benefits overcompensate the impact of higher credit concentrations in the case of the cooperative banks. For savings banks, the results on the net effect depend on how specialization is measured. If specialization is gauged by Hirschman Herfindahl indices, the net effect is an increase of portfolio risk due to the higher sectoral concentration. If specialization is instead measured by distance measures, portfolio risk decreases as the impact of better monitoring abilities prevails.

Keywords: bank lending, loan portfolio, diversification, expected loss, savings banks, cooperative banks, concentration, economic capital, credit risk

JEL Classification: G11, G21

Suggested Citation

Böve, Rolf and Düllmann, Klaus and Pfingsten, Andreas, Do Specialization Benefits Outweigh Concentration Risks in Credit Portfolios of German Banks? (2010). Bundesbank Series 2 Discussion Paper No. 2010,10, Available at SSRN: https://ssrn.com/abstract=2794048

Rolf Böve (Contact Author)

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany

Klaus Düllmann

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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