Finance: Research, Policy and Anecdotes

Sectoral specialization by banks – new measures, new res...

Olivier De Jonghe, Klaas Mulier and I just finished a new version of our sectoral specialization paper and also just published a Vox column on it.

 

Although the importance of sectoral concentration for bank performance and stability has been discussed by economists and regulators alike, there is little empirical evidence, mostly due to lack of data. Olivier, Klaas and I take a new and broader approach to measuring sectoral specialization: a factor-based model, where we gauge whether banks’ stock returns react to sectoral stock indices after controlling for global and domestic stock indices, a financial sector index and the Fama-French factors. Using a return-based approach allows us to take into account that banks are over (or under) exposed to specific economic sectors not only through lending, but also through derivative positions, taken to hedge lending positions or create sectoral exposures without lending. 

 

Our results for over 1,500 banks across 24 countries show that: (i) more sectorally specialized banks experience lower volatility and lower exposure to systemic banking distress and (ii) banks that have more similar sectoral exposures to their peers in the same country and year also experience lower volatility and lower exposure to systemic banking distress, though the last results is driven by the 2008/9 crisis years. These findings are not consistent with the traditional portfolio theory that focuses on diversification benefits, but they are consistent with theories focusing on information asymmetries between lenders and borrowers that can be reduced if lenders specialize. On the first look these findings are not consistent with theories focusing on similarity of banks resulting in higher banking distress; however, we argue that the discount for being different from your peers might stem from information problems in the case of systemic banking distress and from the too-many-to-fail bailout bonus.