Banks' Concentration Versus Diversification in the Loan Portfolio: New Evidence from Germany
42 Pages Posted: 21 Jun 2016
Date Written: 2013
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: Suggested Citation