Do banks diversify loan portfolios?
Author InfoKamp, Andreas Pfingsten, Andreas Porath, Daniel Abstract 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 dista
