Does bigger mean safer for banks?
Edith Cowan University
Place of Publication
Joondalup, Western Australia
Faculty of Business and Public Management
School of Finance and Business Economics
In this study, the effect of bank size on diversification and total risk is examined. We analyse the interrelationship using a sample of Australian banks as it provides two distinct groups of banks in terms of asset size. This dichotomy in the banking structure allows us to clearly contrast the behaviour and the characteristics of component portfolios between the two groups. We document that large banks are better diversified than small banks but the size-related diversification does not result in lower bank risk. Large banks are found to have larger off-balance sheet exposures which offset the risk-reduction benefit of diversification. These findings may have important policy implication in the current era of bank consolidation.