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Swiss Journal of Economics and Statistics
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Could Regional and Cantonal Banks Reduce Credit Risk through National Diversification?

Swiss Journal of Economics and Statistics volume 143, pages 49–65 (2007)Cite this article

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.

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Affiliations

  1. Financial Stability Section, Swiss National Bank, P.O. Box, 8022, Zurich, Switzerland

    Bertrand Rime

Authors
  1. Bertrand Rime
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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.

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Open Access This article is distributed under the terms of the Creative Commons Attribution 2.0 International License ( https://creativecommons.org/licenses/by/2.0 ), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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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

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  • DOI: https://doi.org/10.1007/BF03399233

Key words

  • diversification
  • economic capital
  • consolidation

JEL Classification

  • G21
  • G28
  • G31