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Diversification and determinants of international credit portfolios: Evidence from German banks

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  • Böninghausen, Benjamin
  • Köhler, Matthias
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    Abstract

    This paper examines the international credit portfolios of German banks. We construct a bank-country panel from a unique dataset for a representative set of countries and ask why banks leave diversification opportunities unexploited in some countries. Controlling for bank heterogeneity, we analyse the deviations of actual portfolios from a mean-variance based benchmark and their country-level determinants. Our results show that banking regulations are important determinants of the credit allocation of German banks. We present robust evidence that countries with stricter capital adequacy and entry requirements tend to be overweighted, primarily due to excess profits resulting from a lower level of banking market competition. German banks also overweight countries with larger and more developed banking markets. Moreover, we find support that German banks follow their domestic customers abroad to maintain existing lending relationships. Geographical factors, in contrast, do not seem to matter. Our findings suggest that changes in and convergence of banking regulations as well as financial deepening of banking sectors around the world may, in the long term, result in banks holding more diversified international credit portfolios. --

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    Bibliographic Info

    Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Papers with number 28/2012.

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    Date of creation: 2012
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    Handle: RePEc:zbw:bubdps:282012

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    Keywords: international banking; international financial integration; portfolio choice;

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    1. de Haas, Ralph & van Lelyveld, Iman, 2006. "Foreign banks and credit stability in Central and Eastern Europe. A panel data analysis," Journal of Banking & Finance, Elsevier, Elsevier, vol. 30(7), pages 1927-1952, July.
    2. Claudia M. Buch & John C. Driscoll & Charlotte Ostergaard, 2004. "Cross-Border Diversification in Bank Asset Portfolios," Working Paper, Norges Bank 2004/11, Norges Bank.
    3. Haselmann, Rainer, 2006. "Strategies of foreign banks in transition economies," Emerging Markets Review, Elsevier, Elsevier, vol. 7(4), pages 283-299, December.
    4. Emilia Magdalena Jurzyk & Olena Havrylchyk, 2010. "Inherited or Earned? Performance of Foreign Banks in Central and Eastern Europe," IMF Working Papers, International Monetary Fund 10/4, International Monetary Fund.
    5. Yamori, Nobuyoshi, 1998. "A note on the location choice of multinational banks: The case of Japanese financial institutions," Journal of Banking & Finance, Elsevier, Elsevier, vol. 22(1), pages 109-120, January.
    6. Sven Blank & Claudia M Buch, 2007. "The Euro and Cross-Border Banking: Evidence from Bilateral Data," Comparative Economic Studies, Palgrave Macmillan, vol. 49(3), pages 389-410, September.
    7. Cerutti, Eugenio & Dell'Ariccia, Giovanni & Martinez Peria, Maria Soledad, 2007. "How banks go abroad: Branches or subsidiaries?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 31(6), pages 1669-1692, June.
    8. Daniel E. Nolle & Rama Seth, 1996. "Do banks follow their customers abroad?," Research Paper, Federal Reserve Bank of New York 9620, Federal Reserve Bank of New York.
    9. Düwel, Cornelia & Frey, Rainer & Lipponer, Alexander, 2011. "Cross-border bank lending, risk aversion and the financial crisis," Discussion Paper Series 1: Economic Studies 2011,29, Deutsche Bundesbank, Research Centre.
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