Generalists and Specialists in the Credit Market

Fricke, Daniel and Roukny, Tarik (2018) Generalists and Specialists in the Credit Market. Journal of Banking and Finance.

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Abstract

In this paper, we propose a method to analyze the structure of the credit market. Using historical data from Japan, we explore banks’ lending patterns to the real economy. We find that generalist banks (with diversified lending) and specialist banks (with focused lending) coexist, and tend to stick to their strategies over time. Similarly, we also document the coexistence of generalist and specialist industries (based on their borrowing patterns). The observed interaction patterns in the credit market indicate a strong overlap in banks’ loan portfolios, mainly due to specialist banks focusing their investments on the very same generalist industries. A stylized model matches these patterns and allows us to identify economically meaningful sets of generalist banks/industries. Lastly, we find that generalist banks are not necessarily less vulnerable to shocks compared to specialists. In fact, high leverage levels can undo the benefits of diversification.

Item Type: Article
Keywords: Bank lending, Portfolio theory, Fire sales, Diversification, Systemic risk
Subject(s): Finance
Centre: CABDyN Complexity Centre
Date Deposited: 02 Nov 2018 11:38
Last Modified: 02 Nov 2018 11:38
Funders: n/a
URI: http://eureka.sbs.ox.ac.uk/id/eprint/7038

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