Does diversification improve the performance of German banks?: Evidence from individual bank loan portfolios

Evelyn Hayden, Daniel Porath and Natalja Valeria von Westernhagen ()

No 2006,05, Discussion Paper Series 2: Banking and Financial Studies from Deutsche Bundesbank, Research Centre

Abstract: Should banks be diversified or focused? Does diversification indeed lead to enhanced performance and, therefore, greater safety for banks, as traditional portfolio and banking theory would suggest? This paper investigates the link between banks’ profitability (ROA) and their portfolio diversification across different industries, broader economic sectors and geographical regions measured by the Herfindahl Index. To explore this issue, we use a unique data set of the individual bank loan portfolios of 983 German banks for the period from 1996 to 2002. The overall evidence we provide shows that there are no large performance benefits associated with diversification since each type of diversification tends to reduce the banks’ returns. Moreover, we find that the impact of diversification depends strongly on the risk level. However, it is only for moderate risk levels and in the case of industrial diversification that diversification significantly improves the banks’ returns.

Keywords: focus; diversification; monitoring; bank returns; bank risk (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-bec, nep-eff, nep-fmk and nep-rmg
Date: Written 2006
View list of references View citations in EconPapers

Downloads: (external link)
http://opus.zbw-kiel.de/volltexte/2006/4536/pdf/200605dkp_b.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Access Statistics for this paper

More papers in Discussion Paper Series 2: Banking and Financial Studies from Deutsche Bundesbank, Research Centre
Contact information at EDIRC.
Series data maintained by ZBW - German National Library for Economics ().