International Diversification Gains and Home Bias in Banking
This paper assembles a bank-level dataset covering the operations of 38 international banks from eight industrial countries and their subsidiaries overseas during 1995-2004, and studies the extent of diversification gains from their local operations abroad. The paper finds that international banks with a larger share of assets allocated to foreign subsidiaries, particularly to those located in emerging market countries, are able to attain higher risk-adjusted returns. These gains are somewhat reduced- but by no means depleted-when international banks concentrate their subsidiaries in specific geographical regions. The paper also finds a substantial home bias in the international allocation of bank assets, relative to the results of a mean-variance portfolio optimization model. Overall, international diversification gains in banking appear to be substantial, albeit largely unexploited by current bank expansion strategies. These results suggest that international diversification gains could usefully be considered in the second pillar of Basel II as the first pillar is based only on the idiosyncratic risk of recipient countries.
|Date of creation:||01 Dec 2007|
|Contact details of provider:|| Postal: International Monetary Fund, Washington, DC USA|
Phone: (202) 623-7000
Fax: (202) 623-4661
Web page: http://www.imf.org/external/pubind.htm
More information through EDIRC
|Order Information:||Web: http://www.imf.org/external/pubs/pubs/ord_info.htm|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lessard, Donald R, 1973. "International Portfolio Diversification: A Multivariate Analysis for a Group of Latin American Countries," Journal of Finance, American Finance Association, vol. 28(3), pages 619-633, June.
- La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 1999.
"The Quality of Government,"
Journal of Law, Economics and Organization,
Oxford University Press, vol. 15(1), pages 222-279, April.
- Andrei Shleifer & Robert W. Vishny, 1998. "The Quality of Government," Harvard Institute of Economic Research Working Papers 1847, Harvard - Institute of Economic Research.
- Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert Vishny, 1998. "The Quality of Goverment," NBER Working Papers 6727, National Bureau of Economic Research, Inc.
- Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert Vishny, "undated". "The Quality of Government," Working Paper 19452, Harvard University OpenScholar.
- Levy, Haim & Sarnat, Marshall, 1970. "International Diversification of Investment Portfolios," American Economic Review, American Economic Association, vol. 60(4), pages 668-675, September.
- Barth, James R. & Caprio Jr., Gerard & Levine, Ross, 2001.
"Bank regulation and supervision : what works best?,"
Policy Research Working Paper Series
2725, The World Bank.
- Evelyn Hayden & Daniel Porath & Natalja Westernhagen, 2007.
"Does Diversification Improve the Performance of German Banks? Evidence from Individual Bank Loan Portfolios,"
Journal of Financial Services Research,
Springer;Western Finance Association, vol. 32(3), pages 123-140, December.
- von Westernhagen, Natalja & Porath, Daniel & Hayden, Evelyn, 2006. "Does diversification improve the performance of German banks? Evidence from individual bank loan portfolios," Discussion Paper Series 2: Banking and Financial Studies 2006,05, Deutsche Bundesbank, Research Centre.
- Evelyn Hayden & Daniel Porath & Natalja von Westernhagen, 2006. "Does Diversification Improve the Performance of German Banks? Evidence from Individual Bank Loan Portfolios," Working Papers 110, Oesterreichische Nationalbank (Austrian Central Bank).
- Kenneth R. French & James M. Poterba, 1991.
"Investor Diversification and International Equity Markets,"
NBER Working Papers
3609, National Bureau of Economic Research, Inc.
- French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, vol. 81(2), pages 222-226, May.
- Claudia M. Buch & John C. Driscoll & Charlotte Ostergaard, 2004.
"Cross-border diversification in bank asset portfolios,"
Finance and Economics Discussion Series
2004-26, Board of Governors of the Federal Reserve System (U.S.).
- Claudia M. Buch & John C. Driscoll & Charlotte Ostergaard, 2010. "Cross-Border Diversification in Bank Asset Portfolios," International Finance, Wiley Blackwell, vol. 13(1), pages 79-108, 03.
- Claudia M. Buch & John C. Driscoll & Charlotte Ostergaard, 2004. "Cross-Border Diversification in Bank Asset Portfolios," Working Paper 2004/11, Norges Bank.
- Buch, Claudia M. & Driscoll, John C. & Ostergaard, Charlotte, 2005. "Cross-border diversification in bank asset portfolios," Working Paper Series 0429, European Central Bank.
- Acharya, Viral V & Hasan, Iftekhar & Saunders, Anthony, 2002.
"The Effects of Focus and Diversification on Bank Risk and Return: Evidence from Individual Bank Loan Portfolios,"
CEPR Discussion Papers
3252, C.E.P.R. Discussion Papers.
- Viral V. Acharya & Iftekhar Hasan & Anthony Saunders, 2002. "The effects of focus and diversification on bank risk and return: evidence from individual bank loan portfolios," Proceedings 905, Federal Reserve Bank of Chicago.
- Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:07/281. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow)or (Hassan Zaidi)
If references are entirely missing, you can add them using this form.