Should bank loan portfolio be diversified under government capital injection and deposit insurance fund protection?

Shi Chen and Chuen-Ping Chang

International Review of Economics & Finance, 2015, vol. 38, issue C, 131-141

Abstract: The barrier option theory is applied to the contingent claims of a regulated bank under multiple loan portfolio diversifications and government capital injections. An increase in capital injection increases the bank's interest margin and decreases the default risk. With increased government capital injection, profitability is increased and stability is reduced when the diversification degree increases. The increased return and the reduced risk are attenuated as the deposit insurance fund protection increases. Although the bank faces the two conflicting capitalization policies, we may suggest that loan portfolio should be as diversified as possible, producing better profitability and greater safety for the bank.

Keywords: Default risk; Loan portfolio swap; Industry diversification; Government capital injection; Regulatory barrier (search for similar items in EconPapers)
JEL-codes: G21 G28 G33 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1059056015000398
Full text for ScienceDirect subscribers only

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

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:38:y:2015:i:c:p:131-141

DOI: 10.1016/j.iref.2015.02.017

Access Statistics for this article

International Review of Economics & Finance is currently edited by H. Beladi and C. Chen

More articles in International Review of Economics & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().