Abstract: In the process of business development, banks may pay more attention to the matching of individual business income and default risk, while ignoring the negative impact of excessive concentration of loan business. Based on the quarterly data of Chinese major commercial banks, this paper studies the effect of loan industry concentration on bank returns and discusses the role of bank risk in the influence mechanism. The results showed that the marginal effect of loan industry concentration on bank returns is the quadratic function of risk. When the bank′s risk is very low, a credit increase in industry whose loan proportion is small will increase bank returns volatility and reduce average returns; when the risk is very high, the bank will concentrate credit resources in industry which yield is higher and stable to increase return because the delegated monitoring mechanism is not compatible and the social cost of bank insolvency is very high; when the risk is moderate, the delegated monitoring mechanism will play an efficient role and then loan diversification results in increasing return. During the sample period, vast majority of bank risk value in our database is in the moderate level, an increase in industry concentration will have a significant negative impact on return, but the negative impact is less for state-owned banks. Research conclusions have important theoretical significance for optimizing banking credit structure.

Key words: loan industry concentration, bank returns, bank risk, nonlinear effect