Do banks diversify loan portfolios? A tentative answer based on individual bank loan portfolios
Zusammenfassung
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 only on measures of concentration 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.
Schlüsselwörter
bank lending; loan portfolio; portfolio theory; diversification; concentration measure; distance measure; focus