The Effects Of Loan Portfolio Concentration On Brazilian Banks' Return And Risk
Source: Banco Central do Brasil
This paper tests whether diversification of the credit portfolio at the bank level is associated to better performance and lower risk. The authors employ a new high frequency (monthly) panel data constructed for the Brazilian banking system with information at the bank level for loans by economic sector. They find that loan portfolio concentration increases returns and also reduces default risk; there are significant side effects; foreign and public banks seem to be less affected by the degree of diversification. An important additional finding is that there is an increasing concentration trend after the breakout of the recent international financial crisis, specifically after the failure of Lehman Brothers.