Should banks diversify or focus? Know thyself : The role of abilities

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Title: Should banks diversify or focus? Know thyself : The role of abilities
Author: Francis, Bill B. ; Hasan, Iftekhar ; Küllü, A. Melih ; Zhou, Mingming
Series: Economic Systems
Series volume: 42
Series number: 1
Year of publication: 2018
Publication date: 15.3.2018
DOI: https://doi.org/10.1016/j.ecosys.2017.12.001
Page range: 106-118
Subject (yso): pankit; hajautus; strategia; varainhoito; tuotto
JEL: G21; G28; G34
Other keywords: industry diversification; borrower diversification; asset diversification; bank performance; monitoring; screening
Abstract: The paper investigates whether diversification/focus across assets, industries and borrowers affects bank performance when banks’ abilities (screening and monitoring) are considered. The initial results show that diversification (focus) at the asset, industry and borrower levels is expected to decrease (increase) returns. However, once banks’ screening and monitoring abilities are controlled for, the effect of diversification/focus either gets weaker or disappears. Further, in some cases, these abilities enhance banks’ long-run performance, but in others they prove to be costly, at least, in the short run. Thus, the level of monitoring and screening abilities should be taken into consideration in understanding, planning and implementing diversification/focus strategies.


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