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http://hdl.handle.net/2451/27204
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| Title: | The Effects of Focus and Diversification on Bank Risk and Return:
Evidence from Individual Bank Loan Portfolios |
| Authors: | Acharya, Viral V.
Hasan, Iftekhar
Saunders, Anthony |
| Issue Date: | 7-Dec-2001 |
| Series/Report no.: | S-FI-01-11 |
| Abstract: | We study empirically the effect of focus (specialization) vs.
diversification on the return and the risk of banks using data from 105
Italian banks over the period 1993–1999. Specifically, we analyze
the tradeoffs between (loan portfolio) focus and diversification using a
unique data set that is able to identify individual bank loan exposures
to different industries, to different sectors, and to different
geographical regions. Our results are consistent with a theory that
predicts a deterioration in bank monitoring quality at high levels of
risk and a deterioration in bank monitoring quality upon lending
expansion into newer or competitive industries. We find that industrial
loan diversification reduces bank return while endogenously producing
riskier loans for all banks in our sample, this effect being most
powerful for high-risk banks. Sectoral loan diversification only
produces an inefficient risk–return trade-off for banks with very
high levels of risk. Geographical diversification on the other hand does
result in an improvement in the risk–return tradeoff for banks
with low levels of risk. Overall, our results suggest that
diversification of bank assets is not guaranteed to produce more
performance efficient and/or safer banks. |
| URI: | http://hdl.handle.net/2451/27204 |
| Appears in Collections: | Financial Institutions
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