Banks' Concentration Versus Diversification in the Loan Portfolio: New Evidence from Germany

42 Pages Posted: 21 Jun 2016

See all articles by Nadya Jahn

Nadya Jahn

Institut für Kreditwesen

Christoph Memmel

Deutsche Bundesbank

Andreas Pfingsten

University of Münster - Finance Center Münster

Date Written: 2013

Abstract

Using a unique data set on German banks' sector specific loan exposures to the real economy and the corresponding write-offs and write-downs, we examine the impact of loan portfolio sector concentration on credit risk. By controlling for common risk factors, we separate the bank-specific selection and monitoring abilities from the composition of the loan portfolio. In our empirical study for the period 2003-2011, we find that (a) banks which are specialized in certain industries have, on average, lower loan losses, (b) the loss rate of a given industry in a bank's loan portfolio is lower if the bank has major exposures to this industry, and (c) the standard deviation of the loan losses is lower in the case of more focused banks.

Keywords: loan portfolio, credit risk, loan losses, concentration

JEL Classification: G11, G21, C23, C43

Suggested Citation

Jahn, Nadya and Memmel, Christoph and Pfingsten, Andreas, Banks' Concentration Versus Diversification in the Loan Portfolio: New Evidence from Germany (2013). Bundesbank Discussion Paper No. 53/2013, Available at SSRN: https://ssrn.com/abstract=2796948

Nadya Jahn (Contact Author)

Institut für Kreditwesen ( 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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