Should banks be diversified or focused? Does diversification indeed lead to enhanced performance and, therefore, greater safety for banks, as traditional portfolio and banking theory would suggest?This paper investigates the link between banks' profitability (ROA) and their portfolio diversification across different industries, broader economic sectors and geographical regions measured by the Herfindahl Index. To explore this issue, we use a unique data set of the individual bank loan portfolios of 983 German banks for the period from 1996 to 2002. The overall evidence we provide shows that there are no large performance benefits associated with diversification since each type of diversification tends to reduce the banks' returns. Moreover, we find that the impact of diversification depends strongly on the risk level. However, it is only for moderate risk levels and in the case of industrial diversification that diversification significantly improves the banks' returns.Keywords: focus, diversification, monitoring, bank returns, bank risk JEL Classification: G21, G28, G32 Non-Technical SummaryShould banks be diversified or focused? Does diversification indeed lead to enhanced performance and therefore greater safety for banks as traditional portfolio and banking theory would suggest? In this paper we try to shed some light on these questions by empirically investigating the situation for German banks. By exploiting a unique data set of individual bank loan portfolios for the period from 1996 to 2002, we analyse the link between banks' profitability measured by ROA and their portfolio diversification measured by the Herfindahl Index across different industries, broader economic sectors and geographical regions. To the best of the authors' knowledge, this is the first paper to study the effect of all three types of diversification based jointly on micro-level data on German banks.The relevant academic literature puts forward two conflicting theories concerning the optimal degree of diversification. While traditional banking and portfolio theory recommends that banks should be as diversified as possible to reduce their risks of suffering a costly bank failure, corporate finance theory suggests that a bank should focus so as to obtain the greatest possible benefit from management's expertise and to reduce agency problems.Our results clearly support the latter theory, as the evidence we present indicates that each kind of diversification tends to lower German banks' returns, ie focusing generally increases profitability.Furthermore, the impact of any diversification on banks' return changes in line with the risk level.While the effect of sectoral focus on return declines monotonously with increasing risk, there is mixed evidence to suggest either a monotonously decreasing or a U-shaped relationship for regional focus as well as a rather distinct indication of a U-shape with respect to industrial focus. In addition, our data shows that diversification significantly improves banks' profits only in the case of mo...

Recently, inflammation has received considerable attention in the pathogenesis of both type 2 diabetes and atherosclerosis. The interleukin-1 receptor antagonist (IL-1ra) is a major modulator of the interleukin-1 proinflammatory pathway. We studied the relationship between a variable number tandem repeat (VNTR) polymorphism in intron 2 of the IL-1ra gene (IL1RN) and coronary artery disease (CAD) in patients with and without type 2 diabetes, following 787 consecutive patients admitted for suspected CAD. According to the current criteria of the American Diabetes Association, 250 patients had type 2 diabetes. In this group of patients, allele 2 carriers (n ‫؍‬ 108) had an increased prevalence of CAD compared with noncarriers (85.2 vs. 73.2%), a difference that remained significant in a multivariate logistic regression model (odds ratio 2.2, 95% CI 1.1-4.3, P ‫؍‬ 0.02). No association of CAD with allele 2 carrier status was present among nondiabetic patients (n ‫؍‬ 537). Enzyme-linked immunosorbent assays showed decreased baseline plasma levels of IL-1ra in patients with type 2 diabetes, which may in part explain the role of the IL1RN VNTR in these patients. Diabetes 51: [3582][3583][3584][3585] 2002

Should banks be diversified or focused? Does diversification indeed lead to enhanced performance and, therefore, greater safety for banks, as traditional portfolio and banking theory would suggest?This paper investigates the link between banks' profitability (ROA) and their portfolio diversification across different industries, broader economic sectors and geographical regions measured by the Herfindahl Index. To explore this issue, we use a unique data set of the individual bank loan portfolios of 983 German banks for the period from 1996 to 2002. The overall evidence we provide shows that there are no large performance benefits associated with diversification since each type of diversification tends to reduce the banks' returns. Moreover, we find that the impact of diversification depends strongly on the risk level. However, it is only for moderate risk levels and in the case of industrial diversification that diversification significantly improves the banks' returns.Keywords: focus, diversification, monitoring, bank returns, bank risk JEL Classification: G21, G28, G32 Non-Technical SummaryShould banks be diversified or focused? Does diversification indeed lead to enhanced performance and therefore greater safety for banks as traditional portfolio and banking theory would suggest? In this paper we try to shed some light on these questions by empirically investigating the situation for German banks. By exploiting a unique data set of individual bank loan portfolios for the period from 1996 to 2002, we analyse the link between banks' profitability measured by ROA and their portfolio diversification measured by the Herfindahl Index across different industries, broader economic sectors and geographical regions. To the best of the authors' knowledge, this is the first paper to study the effect of all three types of diversification based jointly on micro-level data on German banks.The relevant academic literature puts forward two conflicting theories concerning the optimal degree of diversification. While traditional banking and portfolio theory recommends that banks should be as diversified as possible to reduce their risks of suffering a costly bank failure, corporate finance theory suggests that a bank should focus so as to obtain the greatest possible benefit from management's expertise and to reduce agency problems.Our results clearly support the latter theory, as the evidence we present indicates that each kind of diversification tends to lower German banks' returns, ie focusing generally increases profitability.Furthermore, the impact of any diversification on banks' return changes in line with the risk level.While the effect of sectoral focus on return declines monotonously with increasing risk, there is mixed evidence to suggest either a monotonously decreasing or a U-shaped relationship for regional focus as well as a rather distinct indication of a U-shape with respect to industrial focus. In addition, our data shows that diversification significantly improves banks' profits only in the case of mo...

The financial health of the banking industry is an important prerequisite for economic stability and growth. As a consequence, the assessment of banks' financial condition is a fundamental goal for regulators. As on-site inspections are usually very costly, take a considerable amount of time and cannot be performed with high frequency, in order to avoid too frequent inspections without loosing too much information, supervisors also monitor banks' financial condition off-site. Typically, off-site supervision is based on different information available to supervisors, which includes mainly balance sheet and income statement data, data on the residual maturity of obligations, and credit register data about loans granted to individual borrowers above a given threshold.Off-site analysis uses different methods, such as CAMEL-based approaches, statistical techniques and credit risk models. Early warning systems based on statistical techniques reflect the rapidity with which the performance of a bank responds to a changing macroeconomic cycle, the conditions on the monetary and financial markets, and the interventions of the supervisory authority. Therefore, for the time being, statistical techniques like discriminant analysis and probit/logit regressions play a dominant role in off-site banking supervision. They allow an estimate to be made of the probability that a bank with a given set of characteristics will fall into one of two or more states, most often failure/non-failure, reflecting the bank's financial condition over an interval of time implied by the study design, usually defined as one year.An interesting academic discussion addresses the different advantages and disadvantages of statistical default prediction models as opposed to structural credit risk models. While statistical approaches do not explicitly model the underlying economic relationships, structural models emerge from corporate finance theory. However, there is ample empirical evidence that structural models perform poorly in predicting corporate bond spreads and corporate bankruptcy. Another problem in applying structural models to bank regulation is usually the lack of market data. For example, in the last decade in Austria only about 1% of a total of 1100 existing banks were listed on a stock exchange. Therefore, we focus on statistical bank default prediction in this paper.There is a quite extensive literature concerning the use of discriminant analysis and logit/probit regressions that distinguish between "good" and "bad" banks. Other statistical