Should Banks Diversify Or Focus? Know Thyself: The Role Of Abilities

Keywords

Asset diversification; Bank performance; Borrower diversification; Industry diversification; Monitoring; Screening

Abstract

The paper investigates whether diversification/focus across assets, industries and borrowers affects bank performance when banks’ abilities (screening and monitoring) are considered. The initial results show that diversification (focus) at the asset, industry and borrower levels is expected to decrease (increase) returns. However, once banks’ screening and monitoring abilities are controlled for, the effect of diversification/focus either gets weaker or disappears. Further, in some cases, these abilities enhance banks’ long-run performance, but in others they prove to be costly, at least, in the short run. Thus, the level of monitoring and screening abilities should be taken into consideration in understanding, planning and implementing diversification/focus strategies.

Publication Date

3-1-2018

Publication Title

Economic Systems

Volume

42

Issue

1

Number of Pages

106-118

Document Type

Article

Personal Identifier

scopus

DOI Link

https://doi.org/10.1016/j.ecosys.2017.12.001

Socpus ID

85042863998 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/85042863998

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