- Open Access
- Published:
Could Regional and Cantonal Banks Reduce Credit Risk through National Diversification?
Swiss Journal of Economics and Statistics volume 143, pages49–65(2007)
Summary
This paper estimates the reduction of credit risk that can be achieved in Switzerland through a national diversification of bank lending. Using a credit risk model based on corporate default rates, we find that the risk of a nationally diversified loan portfolio can be up to 20% smaller than the average of the risks of cantonal 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.
Literature
Acerbi, C. and D. Tasche (2002), “On the Coherence of Expected Shortfall”, Journal of Banking and Finance, 26 (7), pp. 1487–1503.
Acharya, Viral V., Iftekhar Hasan and Anthony Saunders (2002), “Should Banks Be Diversified? Evidence from Individual Bank Loan Portfolios”, BIS Working Paper no. 118.
Allen, Linda and Anthony Saunders (2004), “Incorporating Systemic Influences into Risk Measurements: A Survey of the Literature”, Journal of Financial Services Research, 26, pp. 161–191.
Bangla, Anil, Francis X. Diebold, André Kronimus, Christian Schagen and Til Schuermann (2002), “Ratings Migration and the Business Cycle, With Applications to Credit Portfolio Stress Testing”, Journal of Banking and Finance, 26, pp. 235–264.
Carey, Mark (2002), “A Guide to Choosing Absolute Bank Capital Requirements”, Journal of Banking and Finance, 26, pp. 929–951.
Crouhi, Michel, Dan Galai and Robert Mark (2000), “A Comparative Analysis of Current Credit Risk Models”, Journal of Banking and Finance, 24, pp. 59–117.
Embrechts, Paul (2000), “Extreme value theory: Potential and Limitations as an Integrated Risk Management Tool”, Working Paper, ETH Zurich, Zurich.
Ervin, D.W. and T. Wilde (2001), “Procyclicality in the new Basel Accord”, Risk, October.
Hellwig, Martin (1998), “Allowing for Risk Choices in Diamond’s Financial Intermediation as Delegated Monitoring”, Discussion Paper no. 98-04, Sonderforschungsbereich 504, University of Mannheim, Mannheim.
Leyshon, Andrew and Nigel Thrift (1999), “Lists Come Alive: Electronic Systems of Knowledge and the Rise of Credit-Scoring in Retail Banking”, Economy and Society, 28 (3), pp. 434–66.
Nickell, P., W. Perraudin and S. Varotto (2000), “Stability of Ratings Transitions”, Journal of Banking and Finance, 24 (1/2).
Pesaran, M. Hashem, Til Schuermann, Björn-Jakob Treutler and Scott M. Weiner (2006), “Macroeconomic Dynamics and Credit Risk: A Global Perspective”, Journal of Money, Credit, and Banking, 38 (5).
Swiss National Bank (2006), Die Banken in der Schweiz, Bern.
Saunders, Anthony (1999), Credit Risk Measurement, Wiley Frontiers in Finance, New York.
Wilson, Thomas (1997a), Portfolio Credit Risk (I), Risk, September 1997, pp. 111–117.
Wilson, Thomas (1997b), Portfolio Credit Risk (II), Risk, October 1997, pp. 56–61.
Author information
Affiliations
Corresponding author
Correspondence to Bertrand Rime.
Additional information
The views in this paper do not necessarily reflect those of the Swiss National Bank. The author thanks Robert Bichsel, Swiss National Bank, the editor and an anonymous referee of this journal for their constructive comments.
Rights and permissions
About this article
Cite this article
Rime, B. Could Regional and Cantonal Banks Reduce Credit Risk through National Diversification?. Swiss J Economics Statistics 143, 49–65 (2007). https://doi.org/10.1007/BF03399233
Published:
Issue Date:
Key words
- diversification
- economic capital
- consolidation
JEL Classification
- G21
- G28
- G31
