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Should banks diversify or focus? Know thyself: The role of abilities

Bill B. Francis, Iftekhar Hasan (), A. Melih Küllü and Mingming Zhou

Economic Systems, 2018, vol. 42, issue 1, 106-118

Abstract: The paper investigates whether diversification/focus across assets, industries and borrowers affects bank performance when banks’ abilities (screening and monitoring) are considered. The initial results show that diversification (focus) at the asset, industry and borrower levels is expected to decrease (increase) returns. However, once banks’ screening and monitoring abilities are controlled for, the effect of diversification/focus either gets weaker or disappears. Further, in some cases, these abilities enhance banks’ long-run performance, but in others they prove to be costly, at least, in the short run. Thus, the level of monitoring and screening abilities should be taken into consideration in understanding, planning and implementing diversification/focus strategies.

Keywords: Asset diversification; Industry diversification; Borrower diversification; Monitoring; Screening; Bank performance (search for similar items in EconPapers)
JEL-codes: G21 G28 G34 (search for similar items in EconPapers)
Date: 2018
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