Geographic diversification in banking

doi:10.1016/j.jfs.2014.08.009

Geographic diversification in banking

2014-12-01

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Iman van Lelyveld

DOI：10.1016/j.jfs.2014.08.009

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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%. (c) 2014 Elsevier B.V. All rights reserved.

Keyword:

International diversification

Economic capital

Credit risk

International banking

Value-at-Risk

Business cycle

Geographic diversification in banking

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