IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/12009.html
   My bibliography  Save this paper

Bank sectoral concentration and (systemic) risk: Evidence from a worldwide sample of banks

Author

Listed:
  • Beck, Thorsten
  • De Jonghe, Olivier
  • Mulier, Klaas

Abstract

We propose a new stock return-based methodology to measure three dimensions of banks' sectoral concentration (specialization, differentiation, fi nancial sector exposure). Using these measures for a broad cross-section of banks and countries between 2002 and 2012, we estimate both the short- and long-run relationship between banks' secttoral concentration and banks' performance and stability. We find that bank volatility and systemic risk exposure decrease with banks' sectoral specialization and increase with banks' sectoral differentiation and financial sector exposure. These effects are significantly stronger in the long-run. Moreover, there exists important time and cross- country variation, with effects generally stronger during systemic stress periods.

Suggested Citation

  • Beck, Thorsten & De Jonghe, Olivier & Mulier, Klaas, 2017. "Bank sectoral concentration and (systemic) risk: Evidence from a worldwide sample of banks," CEPR Discussion Papers 12009, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12009
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP12009
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Acharya, Viral V., 2009. "A theory of systemic risk and design of prudential bank regulation," Journal of Financial Stability, Elsevier, vol. 5(3), pages 224-255, September.
    2. Wagner, Wolf, 2010. "Diversification at financial institutions and systemic crises," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 373-386, July.
    3. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W., 1992. "The impact of institutional trading on stock prices," Journal of Financial Economics, Elsevier, vol. 32(1), pages 23-43, August.
    4. Acharya, Viral V. & Yorulmazer, Tanju, 2007. "Too many to fail--An analysis of time-inconsistency in bank closure policies," Journal of Financial Intermediation, Elsevier, vol. 16(1), pages 1-31, January.
    5. Evelyn Hayden & Daniel Porath & Natalja Westernhagen, 2007. "Does Diversification Improve the Performance of German Banks? Evidence from Individual Bank Loan Portfolios," Journal of Financial Services Research, Springer;Western Finance Association, vol. 32(3), pages 123-140, December.
    6. Viral V. Acharya & Lasse H. Pedersen & Thomas Philippon & Matthew Richardson, 2017. "Measuring Systemic Risk," The Review of Financial Studies, Society for Financial Studies, vol. 30(1), pages 2-47.
    7. Stiroh, Kevin J. & Rumble, Adrienne, 2006. "The dark side of diversification: The case of US financial holding companies," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2131-2161, August.
    8. Tabak, Benjamin M. & Fazio, Dimas M. & Cajueiro, Daniel O., 2011. "The effects of loan portfolio concentration on Brazilian banks' return and risk," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 3065-3076, November.
    9. De Jonghe, Olivier, 2010. "Back to the basics in banking? A micro-analysis of banking system stability," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 387-417, July.
    10. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, December.
    11. Laeven, Luc & Levine, Ross, 2009. "Bank governance, regulation and risk taking," Journal of Financial Economics, Elsevier, vol. 93(2), pages 259-275, August.
    12. Flannery, Mark J & James, Christopher M, 1984. "The Effect of Interest Rate Changes on the Common Stock Returns of Financial Institutions," Journal of Finance, American Finance Association, vol. 39(4), pages 1141-1153, September.
    13. Boyd, John H. & Prescott, Edward C., 1986. "Financial intermediary-coalitions," Journal of Economic Theory, Elsevier, vol. 38(2), pages 211-232, April.
    14. Demirgüç-Kunt, Asli & Huizinga, Harry, 2010. "Bank activity and funding strategies: The impact on risk and returns," Journal of Financial Economics, Elsevier, vol. 98(3), pages 626-650, December.
    15. ter Horst, Jenke R. & Nijman, Theo E. & de Roon, Frans A., 2004. "Evaluating style analysis," Journal of Empirical Finance, Elsevier, vol. 11(1), pages 29-53, January.
    16. Klaus Düllmann & Nancy Masschelein, 2007. "A Tractable Model to Measure Sector Concentration Risk in Credit Portfolios," Journal of Financial Services Research, Springer;Western Finance Association, vol. 32(1), pages 55-79, October.
    17. French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, vol. 81(2), pages 222-226, May.
    18. Acharya, Viral V. & Steffen, Sascha, 2015. "The “greatest” carry trade ever? Understanding eurozone bank risks," Journal of Financial Economics, Elsevier, vol. 115(2), pages 215-236.
    19. Viral V. Acharya & Iftekhar Hasan & Anthony Saunders, 2006. "Should Banks Be Diversified? Evidence from Individual Bank Loan Portfolios," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1355-1412, May.
    20. Brown, Stephen J. & Goetzmann, William N., 1997. "Mutual fund styles," Journal of Financial Economics, Elsevier, vol. 43(3), pages 373-399, March.
    21. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
    22. Viral Acharya & Itamar Drechsler & Philipp Schnabl, 2014. "A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk," Journal of Finance, American Finance Association, vol. 69(6), pages 2689-2739, December.
    23. Mr. Gianni De Nicolo & Mr. Myron L. Kwast, 2002. "Systemic Risk and Financial Consolidation: Are they Related?," IMF Working Papers 2002/055, International Monetary Fund.
    24. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 393-414.
    25. Nier, Erlend & Baumann, Ursel, 2006. "Market discipline, disclosure and moral hazard in banking," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 332-361, July.
    26. Rüdiger Fahlenbrach & Robert Prilmeier & René M. Stulz, 2012. "This Time Is the Same: Using Bank Performance in 1998 to Explain Bank Performance during the Recent Financial Crisis," Journal of Finance, American Finance Association, vol. 67(6), pages 2139-2185, December.
    27. Viral V. Acharya & Tanju Yorulmazer, 2008. "Information Contagion and Bank Herding," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(1), pages 215-231, February.
    28. Smirlock, Michael & Gilligan, Thomas & Marshall, William, 1984. "Tobin's q and the Structure-Performance Relationship," American Economic Review, American Economic Association, vol. 74(5), pages 1051-1060, December.
    29. Baele, Lieven & De Bruyckere, Valerie & De Jonghe, Olivier & Vander Vennet, Rudi, 2015. "Model uncertainty and systematic risk in US banking," Journal of Banking & Finance, Elsevier, vol. 53(C), pages 49-66.
    30. Erickson, Timothy & Jiang, Colin Huan & Whited, Toni M., 2014. "Minimum distance estimation of the errors-in-variables model using linear cumulant equations," Journal of Econometrics, Elsevier, vol. 183(2), pages 211-221.
    31. Joshua D. Coval & Tobias J. Moskowitz, 1999. "Home Bias at Home: Local Equity Preference in Domestic Portfolios," Journal of Finance, American Finance Association, vol. 54(6), pages 2045-2073, December.
    32. Baltagi, Badi H & Griffin, James M, 1984. "Short and Long Run Effects in Pooled Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(3), pages 631-645, October.
    33. Olivier De Jonghe & Hans Dewachter & Klaas Mulier & Steven Ongena & Glenn Schepens, 2020. "Some Borrowers Are More Equal than Others: Bank Funding Shocks and Credit Reallocation [A theory of systemic risk and design of prudential bank regulation]," Review of Finance, European Finance Association, vol. 24(1), pages 1-43.
    34. Beltratti, Andrea & Stulz, René M., 2012. "The credit crisis around the globe: Why did some banks perform better?," Journal of Financial Economics, Elsevier, vol. 105(1), pages 1-17.
    35. Mundlak, Yair, 1978. "On the Pooling of Time Series and Cross Section Data," Econometrica, Econometric Society, vol. 46(1), pages 69-85, January.
    36. Böve, Rolf & Düllmann, Klaus & Pfingsten, Andreas, 2010. "Do specialization benefits outweigh concentration risks in credit portfolios of German banks?," Discussion Paper Series 2: Banking and Financial Studies 2010,10, Deutsche Bundesbank.
    37. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    38. De Nicolo, Gianni & Kwast, Myron L., 2002. "Systemic risk and financial consolidation: Are they related?," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 861-880, May.
    39. Ter Horst, J.R. & Nijman, T.E. & de Roon, F.A., 2004. "Evaluating style analysis," Other publications TiSEM 8a501733-7a06-4399-8a43-0, Tilburg University, School of Economics and Management.
    40. Andrew Winton, 1999. "Don’t Put All Your Eggs in One Basket? Diversification and Specialization in Lending," Center for Financial Institutions Working Papers 00-16, Wharton School Center for Financial Institutions, University of Pennsylvania.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Massimiliano Caporin & Mikhail Stolbov & Maria Shchepeleva, 2022. "What drives the expansion of research on banking crises? Cross-country evidence," Applied Economics, Taylor & Francis Journals, vol. 54(52), pages 6054-6064, November.
    2. Isha Agrawal & Rupa Duttagupta & Mr. Andrea F Presbitero, 2017. "International Commodity Prices and Domestic Bank Lending in Developing Countries," IMF Working Papers 2017/279, International Monetary Fund.
    3. Yener Altunbas & Michiel van Leuvensteijn & David Marques-Ibanez, 2013. "Competition And Bank Risk: The Role Of Securitization And Bank Capital," Working Papers 13005, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    4. Böhm, Hannes & Eichler, Stefan, 2020. "Avoiding the fall into the loop: Isolating the transmission of bank-to-sovereign distress in the Euro Area," Journal of Financial Stability, Elsevier, vol. 51(C).
    5. Agarwal,Sumit & Correa,Ricardo & Morais,Bernardo & Roldan,Jessica & Ruiz Ortega,Claudia, 2020. "Owe a Bank Millions, the Bank Has a Problem : Credit Concentration in Bad Times," Policy Research Working Paper Series 9202, The World Bank.
    6. Sheng Huang & Ruichang Lu & Anand Srinivasan, 2022. "Bank Dependence and Bank Financing in Corporate M&A," Management Science, INFORMS, vol. 68(3), pages 2250-2283, March.
    7. Alin Marius Andries & Anca Maria Podpiera & Nicu Sprincean, 2022. "Central Bank Independence and Systemic Risk," International Journal of Central Banking, International Journal of Central Banking, vol. 18(1), pages 81-130, March.
    8. Alin Marius Andries & Anca Maria Podpiera & Nicu Sprincean, 2022. "Central Bank Independence and Systemic Risk," International Journal of Central Banking, International Journal of Central Banking, vol. 18(1), pages 81-130, March.
    9. Olivier De Jonghe & Hans Dewachter & Klaas Mulier & Steven Ongena & Glenn Schepens, 2020. "Some Borrowers Are More Equal than Others: Bank Funding Shocks and Credit Reallocation [A theory of systemic risk and design of prudential bank regulation]," Review of Finance, European Finance Association, vol. 24(1), pages 1-43.
    10. repec:zbw:bofitp:2020_013 is not listed on IDEAS
    11. Altunbas, Yener & Marques-Ibanez, David & van Leuvensteijn, Michiel & Zhao, Tianshu, 2022. "Market power and bank systemic risk: Role of securitization and bank capital," Journal of Banking & Finance, Elsevier, vol. 138(C).
    12. Böhm, Hannes & Eichler, Stefan, 2018. "Avoiding the fall into the loop: Isolating the transmission of bank-to-sovereign distress in the euro area and its drivers," IWH Discussion Papers 19/2018, Halle Institute for Economic Research (IWH).
    13. Böhm, Hannes & Eichler, Stefan, 2019. "Avoiding the Fall into the Loop: Isolating the Transmission of Bank-to-Sovereign Distress in the Euro Area and its Drivers," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203515, Verein für Socialpolitik / German Economic Association.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Beck, Thorsten & De Jonghe, Olivier, 2013. "Lending concentration, bank performance and systemic risk : exploring cross-country variation," Policy Research Working Paper Series 6604, The World Bank.
    2. Thorsten Beck & Olivier De Jonghe & Klaas Mulier, 2022. "Bank Sectoral Concentration and Risk: Evidence from a Worldwide Sample of Banks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(6), pages 1705-1739, September.
    3. Weiß, Gregor N.F. & Neumann, Sascha & Bostandzic, Denefa, 2014. "Systemic risk and bank consolidation: International evidence," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 165-181.
    4. Francis, Bill B. & Hasan, Iftekhar & Küllü, A. Melih & Zhou, Mingming, 2018. "Should banks diversify or focus? Know thyself: The role of abilities," Economic Systems, Elsevier, vol. 42(1), pages 106-118.
    5. Wilson, John O.S. & Casu, Barbara & Girardone, Claudia & Molyneux, Philip, 2010. "Emerging themes in banking: Recent literature and directions for future research," The British Accounting Review, Elsevier, vol. 42(3), pages 153-169.
    6. Bostandzic, Denefa & Weiß, Gregor N.F., 2018. "Why do some banks contribute more to global systemic risk?," Journal of Financial Intermediation, Elsevier, vol. 35(PA), pages 17-40.
    7. VanHoose, David, 2011. "Systemic Risk and Macroprudential Bank Regulation: A Critical Appraisal," Journal of Financial Transformation, Capco Institute, vol. 33, pages 45-60.
    8. Saqib Aziz & Michael Dowling & Jean-Jacques Lilti, 2016. "Bank Acquisitiveness and Financial Crisis Vulnerability," Post-Print hal-01393953, HAL.
    9. Saqib Aziz & Michael Dowling & Jean-Jacques Lilti, 2016. "Bank Acquisitiveness and Financial Crisis Vulnerability," Post-Print halshs-01360952, HAL.
    10. Šeho, Mirzet & Ibrahim, Mansor H. & Mirakhor, Abbas, 2021. "Does sectoral diversification of loans and financing improve bank returns and risk in dual-banking systems?," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    11. Baselga-Pascual, Laura & Trujillo-Ponce, Antonio & Cardone-Riportella, Clara, 2015. "Factors influencing bank risk in Europe: Evidence from the financial crisis," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 138-166.
    12. Fricke, Daniel & Roukny, Tarik, 2020. "Generalists and specialists in the credit market," Journal of Banking & Finance, Elsevier, vol. 112(C).
    13. Ion LAPTEACRU, 2022. "What drives the risk of European banks during crises? New evidence and insights," Bordeaux Economics Working Papers 2022-02, Bordeaux School of Economics (BSE).
    14. Papanikolaou, Nikolaos I. & Wolff, Christian C.P., 2014. "The role of on- and off-balance-sheet leverage of banks in the late 2000s crisis," Journal of Financial Stability, Elsevier, vol. 14(C), pages 3-22.
    15. A. Burietz & L. Ureche-Rangau, 2020. "Better the devil you know: Home and sectoral biases in bank lending," International Economics, CEPII research center, issue 164, pages 69-85.
    16. Christina Bui, 2018. "Bank Regulation and Financial Stability," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 5-2018, January-A.
    17. Ion Lapteacru, 2022. "What drives the risk of European banks during crises? New evidence and insights," Working Papers hal-03775463, HAL.
    18. Mourouzidou-Damtsa, Stella & Milidonis, Andreas & Stathopoulos, Konstantinos, 2019. "National culture and bank risk-taking," Journal of Financial Stability, Elsevier, vol. 40(C), pages 132-143.
    19. Yang, Hsin-Feng & Liu, Chih-Liang & Yeutien Chou, Ray, 2020. "Bank diversification and systemic risk," The Quarterly Review of Economics and Finance, Elsevier, vol. 77(C), pages 311-326.
    20. García-Kuhnert, Yamileh & Marchica, Maria-Teresa & Mura, Roberto, 2015. "Shareholder diversification and bank risk-taking," Journal of Financial Intermediation, Elsevier, vol. 24(4), pages 602-635.

    More about this item

    Keywords

    Bank concentration; Sectoral specialization; Differentiation; Bank risk; Systemic stability; Factor model;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L5 - Industrial Organization - - Regulation and Industrial Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:12009. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.