How loan portfolio diversification affects risk, efficiency and capitalization: A managerial behavior model for Austrian banks |
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| Authors: | Stefania PS Rossi Markus S Schwaiger Gerhard Winkler |
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| Institution: | aDepartment of Economics, University of Cagliari, Italy;bDepartment of Economics, University of Vienna, Austria;cFinancial Markets Analysis and Surveillance Division, Oesterreichische Nationalbank, Austria;dDepartment of Finance and Accounting, Vienna University of Economics and Business, Austria;eCredit Division, Oesterreichische Nationalbank, Austria |
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| Abstract: | The aim of this paper is to analyze how diversification of banks across size and industry affects risk, cost and profit efficiency, and bank capitalization for large Austrian commercial banks over the years 1997–2003. Employing a unique dataset, provided by the Austrian Central Bank, we test for several different types of managerial hypotheses, formalized according to a modified version of the Berger and DeYoung model Berger, A.N., DeYoung, R., 1997. Problem loans and cost efficiency in commercial banks. Journal of Banking and Finance 21, 849–870]. We find that, although diversification negatively affects cost efficiency, it increases profit efficiency and reduces banks’ realized risk. Finally, diversification seems to have a positive impact on banks’ capitalization. |
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| Keywords: | Diversification Risk Cost and profit efficiency Managerial behavior |
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