Does diversification affect the quality of loan portfolio?Panel Granger-causality evidence from US banks

Abstract

This paper investigates the direction of causality between bank business model and the quality of loan portfolio using a large sample of US banks. We employ the panel causality testing approach, developed by Dumitrescu and Hurlin (2012), and new technique of optimal lag selection of Hans et al (2017). Empirical results show that there is evidence of two-way causality between diversification and non-performing loans