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

31 Pages Posted: 6 Jun 2006

See all articles by Andreas Kamp

Andreas Kamp

University of Muenster - Finance Center

Andreas Pfingsten

University of Münster - Finance Center Münster

Christoph Memmel

Deutsche Bundesbank

Andreas Behr

University of Muenster - Faculty of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 23, 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, risk return

JEL Classification: G11, G21, C23, C43

Suggested Citation

Kamp, Andreas and Pfingsten, Andreas and Memmel, Christoph and Behr, Andreas, Diversification and the Banks' Risk-Return-Characteristics - Evidence from Loan Portfolios of German Banks (February 23, 2007). EFA 2006 Zurich Meetings Paper. Available at SSRN: https://ssrn.com/abstract=906448 or http://dx.doi.org/10.2139/ssrn.906448

Andreas Kamp (Contact Author)

University of Muenster - Finance Center ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany

Andreas Pfingsten

University of Münster - Finance Center Münster ( email )

Universitätsstr. 14-16
Muenster, D-48143
Germany

Christoph Memmel

Deutsche Bundesbank ( email )

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

Andreas Behr

University of Muenster - Faculty of Economics ( email )

Universitätsstr. 14-16
48143 Munster
Germany

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