How loan portfolio diversification affects risk, efficiency and capitalization: A managerial behavior model for Austrian banks

Stefania P.S. Rossi, Markus S. Schwaiger and Gerhard Winkler

Journal of Banking & Finance, 2009, vol. 33, issue 12, 2218-2226

Abstract: The aim of this paper is to analyze how diversification of banks across size and industry affects risk, cost and profit efficiency, and bank capitalization for large Austrian commercial banks over the years 1997-2003. Employing a unique dataset, provided by the Austrian Central Bank, we test for several different types of managerial hypotheses, formalized according to a modified version of the Berger and DeYoung model [Berger, A.N., DeYoung, R., 1997. Problem loans and cost efficiency in commercial banks. Journal of Banking and Finance 21, 849-870]. We find that, although diversification negatively affects cost efficiency, it increases profit efficiency and reduces banks' realized risk. Finally, diversification seems to have a positive impact on banks' capitalization.

Keywords: Diversification; Risk; Cost; and; profit; efficiency; Managerial; behavior (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (75)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:33:y:2009:i:12:p:2218-2226

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