Do banks diversify loan portfolios? A tentative answer based on individual bank loan portfolios

Arbeitspapier

Theory of financial intermediation gives contradicting answers to the question whether banks should diversify or focus their loan portfolios. Our aim is to find out which of the two strategies is predominant in the German banking market. To this end we measure diversification for all German banks in the period from 1993 to 2002. As measures we use a broad set of heuristic approaches which capture the deviation of a bank's portfolio from a specified benchmark. Conceivable benchmarks are naive diversification across all industries or, alternatively, the economy's industry structure. With this framework our analysis comprises the widespread measures of concentration, like the Hirschman-Herfindahl index, but also the less known and in this context innovative group of distance measures. We find that different statistical measures of diversification may indicate contradicting results on the individual bank level. Since distance measures are more appealing from a theoretical point of view, the common practice to rely on measures of concentration only in the debate about diversification and focus, may be misleading. We further find that, despite these differences on the individual bank level, both approaches reveal that the majority of banks significantly increased loan portfolio diversification over the last decade. This tendency is especially driven by the large number of credit cooperatives and savings banks. However, some banks (especially regional banks and subsidiaries of foreign banks) reveal a strategy that seems to be more focused on certain industries.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Discussion Paper Series 2 ; No. 2005,03

Classification and Topics

• Classification: Wirtschaft ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Portfolio Choice; Investment Decisions ; Index Numbers and Aggregation; Leading indicators
• Subject: bank lending ; loan portfolio ; portfolio theory ; diversification ; concentration measures ; distance measures ; focus ; Kreditgeschäft ; Diversifikation ; Kreditrisiko ; Portfolio-Management ; Schätzung ; Deutschland

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Kamp, Andreas ; Pfingsten, Andreas ; Porath, Daniel
• Event: Veröffentlichung
• (who): Deutsche Bundesbank
• (where): Frankfurt a. M.
• (when): 2005

Further information

• Handle: http://hdl.handle.net/10419/19736
• Last update: 10.03.2025, 11:41 AM CET