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  • Open Access

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

  • 1
Swiss Journal of Economics and Statistics2007143:BF03399233

https://doi.org/10.1007/BF03399233

  • Published:

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.

Key words

  • diversification
  • economic capital
  • consolidation

Notes

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