Does diversification improve the performance of German banks? Evidence from individual bank loan portfolios

Should banks be diversified or focused? Does diversification indeed lead to enhanced performance and, therefore, greater safety for banks, as traditional portfolio and banking theory would suggest? This paper investigates the link between banks? profitability (ROA) and their portfolio diversification across different industries, broader economic sectors and geographical regions measured by the Herfindahl Index. To explore this issue, we use a unique data set of the individual bank loan portfolios of 983 German banks for the period from 1996 to 2002. The overall evidence we provide shows that there are no large performance benefits associated with diversification since each type of diversification tends to reduce the banks? returns. Moreover, we find that the impact of diversification depends strongly on the risk level. However, it is only for moderate risk levels and in the case of industrial diversification that diversification significantly improves the banks? returns. --focus,diversification,monitoring,bank returns,bank risk

Creditor concentration: an empirical investigation

Most of the literature addressing multiple banking assumes equal financing shares. However, unequal, concentrated or asymmetric bank borrowing is widespread. This paper investigates the determinants of creditor concentration for German firms using a comprehensive bank-firm level dataset for the time period between 1993 and 2003. We document that lending is very often concentrated and, consequently, that relationship lending is important, not only for the small firms but also for the larger firms in our sample. However, we also find that risky, illiquid, large and leveraged firms spread their borrowing more evenly between multiple lenders. On the other hand, the degree of concentration increases with the profitability of the relationship lender. Relationship lending may spur financing provided by other banks, especially if the relationship lender is a public sector bank and if the other banks are large or do not have to tie up additional funds in capital. --bank relationships,asymmetric financing,banking competition

Heterogeneity in lending and sectoral growth: evidence from German bank-level data

This paper studies the sectoral and geographical dimensions of the response of bank lending to sectoral growth. We use several bank-level datasets provided by the Deutsche Bundesbank for the 1996-2002 period. Our results show that bank heterogeneity affects how lending responds to domestic sectoral growth. We document that banks? total lending to German firms reacts procyclically to domestic sectoral growth, while lending exceeding a threshold of ?1.5 million to German and foreign firms does not. Moreover, we find that the response of lending depends on bank characteristics such as the banking groups, the banks? asset size, and the degree of sectoral portfolio concentration. We find that total domestic lending by savings banks and credit cooperatives (including their regional institutions), smaller banks, and banks whose portfolios are heavily concentrated in specific sectors responds positively and, in relevant cases, more strongly to domestic sectoral growth. --bank lending,heterogeneity,sectoral growth

Do exposures to sagging real estate, subprime or conduits abroad lead to contraction and flight to quality in bank lending at home?

We investigate how differential exposures by German banks to the US real estate market affect domestic lending in Germany when home prices started to decline in the US. We find that banks with an exposure to the US real estate sector and to conduits shift their domestic lending to industry–region combinations with lower insolvency ratios following a decrease in US home prices. These banks also contract their lending to German firms more than banks that do not have such exposure. We mainly document that possible losses abroad shift bank lending at home where the size of the effect depends on the type and the degree of exposure the bank has

Does Diversification Improve the Performance of German Banks? Evidence from Individual Bank Loan Portfolios

Should banks be diversified or focused? Does diversification indeed lead to increased performance and therefore greater safety on the part of banks as traditional portfolio and banking theory would suggest? This paper investigates the link between banks’ profitability and their portfolio diversification across different industries, broader economic sectors and geographical regions. To explore this issue, we use a unique data set of the individual bank loan portfolios of 983 German banks for the period from 1996 to 2002. The overall evidence we provide shows that there are no large performance benefits associated with diversification since each type of diversification tends to reduce the banks’ returns. Additionally, we find that banks do not use diversification to operate at a constant level of risk-return efficiency, which implies that banks are not risk-return efficient. Moreover, we find that the impact of diversification strongly depends on the risk level. However, only for moderate risk levels and in the case of industrial diversification does diversification significantly improve the banks’ returns.focus, diversification, monitoring, bank returns, bank risk

German Bank Lending during Emerging Market Crises: A Bank Level Analysis

This paper studies the reaction of bank lending in times of higher risk aversion. In particular, we analyse German bank lending during the Asian and Russian crises, using a bank level data set from the Deutsche Bundesbank. Our aim is to gain more insight into the pattern of bank lending during financial crises in emerging markets. We find that German banks reacted to the Asian crisis mainly by reallocating their portfolios among emerging markets. In addition, lending of large commercial banks was less stable than the lending of public sector banks. By contrast, banks' behaviour during the Russian crisis is mainly characterised by a general withdrawal from emerging markets. Differences between the banking groups were not as pronounced as during the Asian crisis. (JEL F30, F32, F34

German Bank Lending During Financial Crises: A Bank Level Analysis

This paper studies German bank lending during the Asian and Russian crises, using a bank level data set from the Deutsche Bundesbank. Our aim is to gain more insight into the pattern of German bank lending during financial crises in emerging markets. We find that German banks reacted to the Asian crisis mainly by reallocating their portfolios among emerging markets. By contrast, the banks' behaviour during the Russian crisis is characterised by a general withdrawal from emerging markets. We find that the lending of large commercial banks was less stable than the lending of public sector banks during the Asian crisis. Differences were not as pronounced during the Russian crisis.bank lending; banking; contagion; currency crises; emerging markets crises; financial stability