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Loan portfolio diversification, market structure and bank stability

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  • Shim, Jeungbo

Abstract

This paper examines whether the choice of bank loan diversification and market concentration are associated with a bank's financial stability. This study also investigates how the effect of loan diversification on bank stability varies depending on the level of the concentration or the competitiveness of the banking market. We find that increased loan diversification has a positive impact on the bank's financial strength. We show that market concentration is negatively associated with bank insolvency risk, consistent with the “concentration-stability” view. The results using interaction terms between loan portfolio diversification and market concentration indicate that diversifying banks operating in highly concentrated markets are more financially stable compared to those in less concentrated markets.

Suggested Citation

  • Shim, Jeungbo, 2019. "Loan portfolio diversification, market structure and bank stability," Journal of Banking & Finance, Elsevier, vol. 104(C), pages 103-115.
    • Handle: RePEc:eee:jbfina:v:104:y:2019:i:c:p:103-115
    DOI: 10.1016/j.jbankfin.2019.04.006
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    More about this item

    Keywords

    Loan diversification; Market concentration; Banking; Financial stability;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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