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

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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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Author information

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.

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Key words

  • diversification
  • economic capital
  • consolidation

JEL Classification

  • G21
  • G28
  • G31