Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212996 
Year of Publication: 
2019
Series/Report no.: 
BoF Economics Review No. 3/2019
Publisher: 
Bank of Finland, Helsinki
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.
Subjects: 
pankit
luotot
euroalue
Persistent Identifier of the first edition: 
Document Type: 
Research Report

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