Cross-border loan portfolio diversification, capital requirements, and the European Banking Union

Bericht

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: BoF Economics Review ; No. 3/2019

Classification and Topics

• Classification: Wirtschaft
• Subject: pankit ; luotot ; euroalue

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Jokivuolle, Esa ; Virén, Matti
• Event: Veröffentlichung
• (who): Bank of Finland
• (where): Helsinki
• (when): 2019

Further information

• Handle: http://hdl.handle.net/10419/212996
• Last update: 10.03.2025, 11:45 AM CET