Could Regional and Cantonal Banks Reduce Credit Risk through National Diversification?
AbstractThis paper evaluates the reduction of credit risk that can be achieved in Switzerland by a national diversification of bank lending. Using a credit risk model based on corporate default rates, I find that the risk of a nationally diversified loan portfolio is up to 20% smaller than the sum of the risks of regional portfolios. From a financial stability perspective, this substantial risk diversification potential should motivate particular scrutiny on the more than hundred Swiss banks staying on the regional business model.
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Bibliographic InfoArticle provided by Swiss Society of Economics and Statistics (SSES) in its journal Swiss Journal of Economics and Statistics.
Volume (Year): 143 (2007)
Issue (Month): I (March)
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diversification; economic capital; consolidation;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
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