Banks’ Specialization Versus Diversification in the Loan Portfolio New Evidence from Germany

Do banks with a specialized credit portfolio have superior selection and monitoring abilities? Controlling for the composition of the banks' loan portfolios, we show that specialized banks have lower loan loss rates. We also see that for more focused German banks in our sample period 2003–2011 the standard deviation of loan loss rates seems to be lower. Moreover, the loan loss rate of a given industry in a bank‘s loan portfolio is lower if the bank has a major exposure to that industry