Journal of Financial Services Research

, Volume 27, Issue 1, pp 27–49

Diversification and Performance in Banking: The Israeli Case

Original Article

DOI: 10.1007/s10693-005-6411-6

Cite this article as:
Landskroner, Y., Ruthenberg, D. & Zaken, D. J Finan Serv Res (2005) 27: 27. doi:10.1007/s10693-005-6411-6

Abstract

This paper analyzes performance and portfolio choice of banks’ investments across business units using methodologies developed mainly for equity investments. The backgrounds to the paper are major recent developments in the financial services industry, mainly consolidation in the banking industry that raised the issue of efficiency gains due to diversification. The paper focuses on banks in Israel as an extended case study, using the fact that Israeli banks have operated as (limited) universal banks for a long time. The results suggest that there are gains to diversification and that risk adjusted performance is mostly consistent with optimal portfolio choice. Most of the previous research in this area has been done in the US. These studies necessarily focused on hypothetical combinations of different business activities because of the legal limits on US banks. Thus this paper adds to the literature both by examining actual combinations and looking at another country.

Key words

Diversification gainsefficient frontieroptimal portfolioRAROCV—risk adjusted return on capitalVARV—value at risk

Copyright information

© Springer Science + Business Media, Inc. 2005

Authors and Affiliations

  • Yoram Landskroner
    • 1
    • 2
  • David Ruthenberg
    • 1
    • 3
  • David Zaken
    • 3
  1. 1.Hebrew University of JerusalemJerusalem
  2. 2.Stern School of Business New York UniversityUSA
  3. 3.Bank of IsraelIsrael