Description:
Theoretical studies of bank existence reveal the importance of informational asymmetries (cf., for example, Diamond(1984)). This might suggest that banks specialise their loan origination in specific industries to exploit information advantages. However, modern portfolio theory, although not directly applicable to banks, as well as the concept of herding behaviour would instead tend to imply that banks' loan portfolios should mimic the industry composition of the total loan market.Using aggregated loan data from 1970 to 2001 for 7 bank groups and up to 16 industries, we examine which of the competing hypothesises is more convincing empirically. As a new methodology, distance measures are defined to evaluate deviations of banks' portfolios from the market average.It turns out that almost all measures reveal a relatively distinct trend towards the industry composition of the market portfolio for most bank groups. However, differences in the pace as well as in the remaining deviation can be observed. It is noteworthy that only in a few industries certain bank groups remain dominant with markets shares well above average while in other industries each bank group holds a proportion according to its market share. Finally, the results shed light on the different roles central banks of the cooperative and public sectors play for diversification