Loan portfolio diversification, market structure and bank stability

Jeungbo Shim

Journal of Banking & Finance, 2019, vol. 104, issue C, 103-115

Abstract: This paper examines whether the choice of bank loan diversification and market concentration are associated with a bank's financial stability. This study also investigates how the effect of loan diversification on bank stability varies depending on the level of the concentration or the competitiveness of the banking market. We find that increased loan diversification has a positive impact on the bank's financial strength. We show that market concentration is negatively associated with bank insolvency risk, consistent with the “concentration-stability” view. The results using interaction terms between loan portfolio diversification and market concentration indicate that diversifying banks operating in highly concentrated markets are more financially stable compared to those in less concentrated markets.

Keywords: Loan diversification; Market concentration; Banking; Financial stability (search for similar items in EconPapers)
JEL-codes: G21 G33 L22 L25 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (39)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:104:y:2019:i:c:p:103-115

DOI: 10.1016/j.jbankfin.2019.04.006

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