The Effect of Credit Portfolio Diversification and Ownership on Banks’ Risk Exposure. A case study of the Norwegian banking market

In this paper we attempt to provide evidence on the effect of credit portfolio diversification in two dimensions, industrial and geographical diversification. Further, we analyze whether differences in banks' risk exposure are related to different ownership structures. We use an empirical approach and comprehensive data from the Norwegian banking market, containing annual information on 142 banks over the period 2005-2013. We measure the impact on two different variables reflecting risk in different ways; risk of insolvency by using the Z-score and banks' credit portfolio risk using the loan loss ratio. Our findings suggest that banks' choice of diversification strategy has a significant impact on banks' risk exposure. We find that increased industrial diversification reduces Norwegian banks' risk. Moreover, our findings indicate that increased geographical diversification increases banks’ risk of insolvency. We do however not find conclusive evidence suggesting that bank ownership is relevant when explaining banks’ risk exposure in the Norwegian banking market.