Title: | Cross-border loan portfolio diversification, capital requirements, and the European Banking Union |
Author: | Jokivuolle, Esa ; Virén, Matti |
Organization: |
Bank of Finland
Suomen Pankki |
Series: | BoF Economics Review |
Series number: | 3/2019 |
Year of publication: | 2019 |
Publication date: | 28.5.2019 |
Pages: | 11 |
Subject (yso): | pankit; luotot; euroalue |
Abstract: | We provide preliminary evidence of potential risk reduction benefits from banks’ loan portfolio diversification cross-border within the Euro area. Using aggregate data on banking sector cor-porate loan losses for each Euro area member-state, our estimates suggest that the static diversification benefit could be substantial. The minimum capital needed to withstand the max-imum annual loss from a hypothetical fully diversified Euro area bank loan portfolio over the period 2001-2017 would have been only 40 % of the total capital needed to withstand the maximum losses on a country by country basis. We also calibrate the country-specific loan loss distributions and the Euro area portfolio’s loss distribution to the Vasicek (2002) model, which underlies the Basel framework’s Internal Ratings Based Approach. We find that the im-plied asset correlation parameter of a median country portfolio is about twice as large as that of the fully diversified Euro area portfolio. |
Rights: | https://helda.helsinki.fi/bof/copyright |
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