Could Regional and Cantonal Banks Reduce Credit Risk through National Diversification?

Bertrand Rime

Swiss Journal of Economics and Statistics (SJES), 2007, vol. 143, issue I, pages 49-65

Abstract: This 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.

Keywords: diversification; economic capital; consolidation (search for similar items in EconPapers)
JEL-codes: G21 G28 G31 (search for similar items in EconPapers)
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