Financial Crisis and Sectoral Diversification of Argentine Banks, 1999-2004

Abstract

We explore the impact and evolution of loan portfolio diversification during the 2001-2002 Argentine financial crisis. Using a novel dataset that combines public information on the main activity of the largest 930 Argentine firms with their borrowing from each bank operating in the country during the 1999-2004 period, we find that banks did not modify much their loan portfolio mix as a response to the crisis, even though the econometric results point to a positive effect of sectoral diversification and lending to tradeable sectors on bank profitability and risk mitigation. Our results suggest that larger banks benefit more from diversification that smaller ones, and that the benefits of diversification are greater during the downside of the business cycle.

The effects of loan portfolio concentration on Brazilian banks’ return and risk

“…Among other reasons, concentration in bank's loan portfolios have caused many banking crises in the last 25 years, which supports the view that risk is highly associated with this strategy (Basel Committee on Banking Supervision, 1991). Argentinean banks on the Argentinean financial crisis of 2001 and 2002 (Bebczuk and Galindo, 2008) and by Austrian banks over the years 1997-2003(Rossi et al, 2009) also provide empirical support to this view.…”

“…Country Period Types of diversification Empirical findings Meyer and Yeager (2001) US 1990-1997 Small geographically concentrated banks are not vulnerable to local economic downturns Stiroh and Rumble (2006) US 1997-2002 Sources of income Diversification is positive for bank performance; the expansion to more volatile activities, however, offset these benefits Acharya et al (2006) Italy 1993-1999 Economic sectors and broad asset sector decomposition Concentration increases returns and reduces risks; a U-shaped concentration-return relation as function of risk is found Mercieca et al (2007) Bebczuk and Galindo (2008) and Berger et al (2010), there is a lack of evidence and discussion regarding the effects of the loan portfolio composition on banks of emerging economies like Brazil's. Given the uniqueness of their economic conditions, the results may be different from those observed in developed countries.…”

“…The loan portfolios of Brazilian banks are only found to be more diversified than the ones from Argentina, in which the average HHI is 0.55 (Bebczuk and Galindo, 2008). Table 3 shows the cross correlations of the explanatory variables.…”

The effect of loan portfolio diversification on banks’ risks and return

“…Banks that are not well diversified are more susceptible to the economic volatility of the sectors in which they concentrate their activities than banks that are well diversified (Tabak et al , 2011; Winton, 1999). Empirical studies by Bebczuk and Galindo (2008) and Rossi et al (2009) provide support for this theory in the Argentinean and Austrian banking industries, respectively.…”

Impaired Loan in Commercial Banks, a Benediction or Atrocity? An Empirical Investigation on Selected Sub-Saharan African Countries

“…Similarly, Tabak, Fazio, and Cajuerio assessed whether banks operating within the Brazilian banking system concentrate or diversify their credit portfolios, and how this choice impacts their performance and risk [7]. The study found out that Brazilian banks' loan portfolios are more concentrated than those of developed countries like Germany, Italy and the U.S. Bebczuk and Galindo evaluated the sectoral diversification of Argentine banks [8]. The study revealed that larger banks benefit more from diversification than smaller ones.…”