In this paper, we propose a method to analyze the structure of the credit market.
Using historical data from Japan, we explore banks' lending patterns to the real economy.
We find that generalist banks (with diversified lending) and specialist banks (with
focused lending) coexist, and tend to stick to their strategies over time. Similarly,
we also document the coexistence of generalist and specialist industries (based on
their borrowing patterns). The observed interaction patterns in the credit market
indicate a strong overlap in banks' loan portfolios, mainly due to specialist banks
focusing their investments on the very same generalist industries. A stylized model
matches these patterns and allows us to identify economically meaningful sets of generalist
banks/industries. Lastly, we find that generalist banks are not necessarily less vulnerable
to shocks compared to specialists. In fact, high leverage levels can undo the benefits
of diversification. (C) 2018 Elsevier B.V. All rights reserved.
