International Diversification Gains and Home Bias in Banking

IMF Working Papers, December 1, 2007

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International Diversification Gains and Home Bias in Banking

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Bibliographic details

• Authors: Alicia García-Herrero, Francisco F. Vazquez
• Published: December 1, 2007
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451868449.001

Dataset and scope

• Assembles a bank-level dataset covering the operations of 38 international banks from eight industrial countries and their subsidiaries overseas during 1995-2004.
• Pages: 29
• Volume: 2007
• Issue: 281
• Series: Working Paper No. 2007/281
• DOI: https://doi.org/10.5089/9781451868449.001
• Stock No: WPIEA2007281
• ISBN: 9781451868449
• ISSN: 1018-5941

Main findings on diversification gains

• International banks with a larger share of assets allocated to foreign subsidiaries, particularly to those located in emerging market countries, are able to attain higher risk-adjusted returns.
• These gains are somewhat reduced—but by no means depleted—when international banks concentrate their subsidiaries in specific geographical regions.
• Overall, international diversification gains in banking appear to be substantial, albeit largely unexploited by current bank expansion strategies.

Home bias and portfolio optimization

• The paper finds a substantial home bias in the international allocation of bank assets, relative to the results of a mean-variance portfolio optimization model.

Policy implications and recommendations

• Results suggest that international diversification gains could usefully be considered in the second pillar of Basel II as the first pillar is based only on the idiosyncratic risk of recipient countries.

Subjects and keywords

• Subject: Asset allocation, Banking, Emerging and frontier financial markets, Foreign banks, International banking
• Keywords: bank assets, international bank, parent bank, WP

International Diversification Gains and Home Bias in Banking; Alicia García-Herrero, Francisco F. Vazquez; December 1, 2007.