Geographic diversification in banking |
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| Institution: | 1. Stuart School of Business, Illinois Institute of Technology, 10 West 35th Street, 18th Floor, Chicago, IL 60616, United States;2. De Nederlandsche Bank, PO Box 98, 1000 AB Amsterdam, The Netherlands;3. Bank for International Settlements, Centralbahnplatz 2, Basel, Switzerland;1. Department of Banking and Finance, Monash University, PO Box 197, Caulfield East 3145, VIC, Australia;2. School of Economics, Finance and Marketing, RMIT University, Melbourne, VIC, Australia;1. School of Finance, Guangdong University of Finance and Economics, China;2. School of Economics, Finance and Management, University of Bristol, United Kingdom;3. Alliance Manchester Business School, University of Manchester, United Kingdom;1. Robert Day School of Economics and Finance, Claremont McKenna College, Bauer Center 325, 500 E. Ninth Street, Claremont, CA 91711, United States;2. College of Business & Public Management, University of La Verne, 1950 3rd St., La Verne, CA 91750, United States;1. Queen''s Management School, Queen''s University Belfast, Belfast, UK;2. LAPE, Université de Limoges, Limoges, France;1. ISCTE Business School, Instituto Universitário de Lisboa, Portugal;2. Caixa Geral de Depósitos, Portugal;3. Università degli Studi del Molise, Italy |
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| Abstract: | In the aftermath of the 2007–2009 crisis, banks claiming positive diversification benefits are being met with skepticism. Nevertheless, diversification might be important and sizable for some large internationally active banking groups. We use a universally applicable correlation matrix approach to calculate international diversification effects, in which bank subsidiaries are treated as individual assets of the banking group portfolio. We apply the framework to 49 of the world's largest banking groups with significant foreign business units over the 1992–2009 period. Focusing on the most important risk in banking, credit risk, we find that allowing for geographical diversification could reduce banks’ credit risk by 1.1% on average, with risk reduction ranging from negligible up to 8%. |
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| Keywords: | International diversification Economic capital Credit risk International banking Value-at-Risk Business cycle |
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