This paper proposes a new stock return-based methodology to measure bank’s sectoral specialization and differentiation. Using these measures for a broad cross-section of banks and countries over the period 2002 to 2011, this paper is the first to empirically gauge both the short- and long-run relationship between banks’ sectoral specialisation and differentiation, on the one hand, and banks’ performance and stability, on the other hand, in a large cross-country sample. The authors find that (i) sectoral specialisation (differentiation) decreases (increases) volatility and systemic risk exposure, while leading to moderately higher (lower) valuation; (ii) that the long-run impact is significantly stronger than the short-run impact, suggesting the importance of bank-level time-invariant factors; and (iii) that there exists important time, cross-bank, and cross-country variation in these relationships.

Thorsten Beck is professor of banking and finance at Cass Business School in London. He is also a research fellow of the Centre for Economic Policy Research (CEPR) and the CESifo. He was professor of economics from 2008 to 2014 at Tilburg University and the founding chair of the European Banking Center from 2008 to 2013. Previously he worked in the research department of the World Bank and has also worked as consultant for – among others - the European Central Bank, the BIS, the IMF, the European Commission, and the German Development Corporation. His research, academic publications and operational work have focused on two major questions: What is the relationship between finance and economic development? What policies are needed to build a sound and effective financial system? Recently, he has concentrated on access to financial services, including SME finance, as well as on the design of regulatory and bank resolution frameworks. In addition to numerous academic publications in leading economics and finance journals, he has co-authored several policy reports on access to finance, financial systems in Africa and cross-border banking. His country experience, both in operational and research work, includes Bangladesh, Bolivia, Brazil, China, Colombia, Egypt, Mexico, Russia and several countries in Sub-Saharan Africa. In addition to presentation at numerous academic conferences, including several keynote addresses, he is invited regularly to policy panels across Europe. He holds a PhD from the University of Virginia and an MA from the University of Tübingen in Germany. He is Managing (Co)editor of Economic Policy and Co-Editor of the Review of Finance.