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Finance Seminar

Authors:

• Thorsten Beck
  Tilburg University

• Olivier De Jonghe
  Tilburg University

Using both market-based and annual report based approaches to measure lending specialization for a broad cross-section of banks and countries over the period 2002 to 2011, this paper is the first to empirically gauge the relationship between bank' lending specialization and bank performance and stability in an international sample. Theory suggests that banks might benefit from specialization in the form of higher screening and monitoring efficiency, while a diversified loan portfolio might also enhance stability. We find that sectoral specialization increases volatility and systemic risk exposures, while not leading to higher returns. We also document important time, cross-bank, and cross-county variation in this relationship, which is stronger post 2007, for richer countries, for countries without regulatory requirements on diversification, for banks with lower market power and banks with more traditional intermediation models.