Do banks diversify loan portfolios? A tentative answer based on individual bank loan portfolios

Theory of financial intermediation gives contradicting answers to the question whether banks should diversify or focus their loan portfolios. Our aim is to find out which of the two strategies is predominant in the German banking market. To this end we measure diversification for all German banks in the period from 1993 to 2002. As measures we use a broad set of heuristic approaches which capture the deviation of a bank's portfolio from a specified benchmark. Conceivable benchmarks are naive diversification across all industries or, alternatively, the economy's industry structure. With this framework our analysis comprises the widespread measures of concentration, like the Hirschman-Herfindahl index, but also the less known and in this context innovative group of distance measures. We find that different statistical measures of diversification may indicate contradicting results on the individual bank level. Since distance measures are more appealing from a theoretical point of view, the common practice to rely on measures of concentration only in the debate about diversification and focus, may be misleading. We further find that, despite these differences on the individual bank level, both approaches reveal that the majority of banks significantly increased loan portfolio diversification over the last decade. This tendency is especially driven by the large number of credit cooperatives and savings banks. However, some banks (especially regional banks and subsidiaries of foreign banks) reveal a strategy that seems to be more focused on certain industries. --bank lending,loan portfolio,portfolio theory,diversification,concentration measures,distance measures,focus

Do specialization benefits outweigh concentration risks in credit portfolios of German banks?

Lending specialization on certain industry sectors can have opposing effects on monitoring (including screening) abilities and on the sectoral concentration risk of a credit portfolio. In this paper, we examine in the first part if monitoring abilities of German cooperative banks and savings banks increase with their specialization on certain industry sectors. We observe that sectoral specialization generally entails better monitoring quality, particularly in the case of the cooperative banks. In the second part we measure the overall effect of better monitoring and the associated higher sectoral credit concentrations on the credit risk of the portfolio. Our empirical results suggest that specialization benefits overcompensate the impact of higher credit concentrations in the case of the cooperative banks. For savings banks, the results on the net effect depend on how specialization is measured. If specialization is gauged by Hirschman Herfindahl indices, the net effect is an increase of portfolio risk due to the higher sectoral concentration. If specialization is instead measured by distance measures, portfolio risk decreases as the impact of better monitoring abilities prevails. --bank lending,loan portfolio,diversification,expected loss,savings banks,cooperative banks,concentration,economic capital,credit risk

Wider den Regulierungsreflex

Nachdem die Immobilienkrise in den USA auch Deutschland erreicht und die IKB Deutsche Industriebank AG sowie die sächsische Landesbank Sachsen LB in Schwierigkeiten gebracht hat, werden Forderungen laut, die Banken stärker zu regulieren. Was sind die Ursachen für die Schwierigkeiten der deutschen Banken? Hat die Bankenaufsicht Fehler gemacht? Sollte sie reformiert werden? Ist eine Vereinheitlichung der Bankenaufsicht auf der EU-Ebene erforderlich? --

Diversification and the banks' risk-return-characteristics: evidence from loan portfolios of German banks

Banks face a tradeoff between diversifying and focusing their loan portfolio. In this paper we carry out an empirical study for the German market to shed light on the question whether or not the benefits of risk sharing outweigh those of specialization. We use data from the Bundesbank's quarterly borrowers statistic to determine the degree of diversification in the banks' loan portfolios and combine this data with the banks' balance sheets and audit reports. The unique database comprises data from all German banks during the period from 1993 to 2003. Our main results can be summarized in three statements: i) Specialized banks have a slightly higher return than diversified banks. ii) Specialized banks have lower relative loan loss provisions and lower shares of non-performing loans, iii) However, the standard deviations of the loan loss provision ratio and the non-performing loan ratio are lower for diversified banks. --bank lending,loan portfolio,portfolio theory,diversification,riskreturn analysis

Rocky Wenton -- Legacy of Learning

Written interview with Rocky Welton, two-time recipient of the Teacher of the Year award presented by the Association of Hispanic Professionals in both 1990 and 1997.https://scholars.fhsu.edu/ors/1283/thumbnail.jp

Determinants for using visible reserves in German banks: an empirical study

The German Commercial Code (HGB) allows banks to build visible reserves for general banking risks according to section 340g HGB. These GBR reserves may, in addition to their risk provisioning function, be used to enhance capital endowment, for internal financing, signaling or earnings management purposes. We analyze financial statements of German banks for the period from 1995 through 2007 to reveal specific patterns in the use of GBR reserves. Our empirical investigation is based on a large, unbalanced panel of German banks including 32,023 bank-year observations. We see an increase in the use of GBR reserves over time. Furthermore, we can say that GBR reserves are primarily used by large banks, banks with comparatively low regulatory capital endowment, as well as those with lower risks. Furthermore, GBR reserves are used by fairly profitable banks, those reporting according to international financial reporting standards in addition to HGB, and banks which are not thrifts or cooperative banks. Finally, we find that banks which make use of hidden reserves according to section 340f HGB also tend to hold GBR reserves. We explain our findings with regulatory factors and existing information asymmetries as well as banks' size and ownership structure. --Bank regulation,informational asymmetries,risk provisioning,visible reserves,hidden reserves

The importance of qualitative risk assessment in banking supervision before and during the crisis

Banking supervision requires regular inspection and assessment of financial institutions. In Germany this task is carried out by the central bank ('Deutsche Bundesbank, BBK') in cooperation with the Federal Financial Supervisory Authority ('Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin'). In accordance with the Basel II approach, quantitative and qualitative information is used. It is still an open question whether supervisors provide information, based on on-site inspections, which is not known from the numbers already, or simply duplicate the quantitative information, or even overrule it by their impressions gained through visits. In our analysis we use a unique dataset on financial institutions' risk profiles, i.e. the banking supervisors' risk assessment. Methodologically, we apply a partial proportional odds model to explain the supervisor's ordinal grading by a purely quantitative CAMEL covariate vector, which is standard in many bank rating models, and we also include the bank inspector's qualitative risk assessment into the model. We find that not only the quantitative CAMEL vector is clearly important for the final supervisory risk assessment; it is, indeed, also qualitative information on a bank's internal governance, ICAAP, interest rate risk, and other qualitative risk components that plays an equally important role. Moreover, we find evidence that supervisors have become more conservative in their final judgement at the beginning of the financial crisis, i.e. the supervisory assessment seems to be more forward-looking than the mere numbers. This result underpins the importance of bank-individual on-site risk assessments. --Bank rating,banking supervision,generalized ordered logit

Approximate Inference for Robust Gaussian Process Regression

Gaussian process (GP) priors have been successfully used in non-parametric Bayesian regression and classification models. Inference can be performed analytically only for the regression model with Gaussian noise. For all other likelihood models inference is intractable and various approximation techniques have been proposed. In recent years expectation-propagation (EP) has been developed as a general method for approximate inference. This article provides a general summary of how expectation-propagation can be used for approximate inference in Gaussian process models. Furthermore we present a case study describing its implementation for a new robust variant of Gaussian process regression. To gain further insights into the quality of the EP approximation we present experiments in which we compare to results obtained by Markov chain Monte Carlo (MCMC) sampling

Strategic sports sponsoring in practice : consideration of the FIA Formula E on possibilities, motives and benefits of sponsoring

Die Bachelorarbeit befasst sich mit dem Sportsponsoring in der FIA Formel E. Zu Beginn der Arbeit werden alle relevanten theoretischen Aspekte rund um das Thema Sponsoring geklärt. Im darauffolgenden Kapitel wird Sportsponsoring erklärt, welche Ziele verfolgt werden und welche unterschiedlichen Ausprägungen es gibt. Im letzten Teil der Arbeit wird das Sportsponsoring in der FIA Formel E mit Hilfe der theoretischen Grundlagen genauer beleuchtet. Dabei wird vor allem auf die Sponsoringmöglichkeiten in der Rennserie eingegangen, aber auch welche Motive ein Sponsor verfolgt und welchen Nutzen er aus einem Sponsoringengagement ziehen kann