Pymes

WP/07/281

International Diversification Gains and Home Bias in Banking
Alicia García-Herrero and Francisco Vazquez

© 2007 International Monetary Fund

WP/07/281

IMF Working Paper Monetary and Capital Markets International Diversification Gains and Home Bias in Banking Prepared by Alicia García-Herrero and Francisco Vázquez Authorized for distribution by Carlos Medeiros December 2007Abstract This Working Paper should not be reported as representing the views of the IMF.
The views expressed in this article are those of the authors’ and not necessarily those of the institutions they are affiliated with. Excellent assistance in data collection was provided by Enrique Martínez Casillas and Kalin Tintchev. The authors wish to thank, without implicating, Nicolás Amoroso, SergioGavilá, Hans Genberg, Robert McCauley, Carlos Medeiros, Pedro Rodríguez, Rafael Romeu, Daniel Santabárbara, Miguel Segoviano and Doo Yong Yang for comments. We also thank participants at several seminars where the paper was presented (IMF, Hong Kong Institute of Monetary Research, Bank of Korea, and Monetary Authority of Singapore). This paper assembles a bank-level dataset covering the operationsof 38 international banks from eight industrial countries and their subsidiaries overseas during 1995–2004, and studies the extent of diversification gains from their local operations abroad. The paper finds that 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-adjustedreturns. These gains are somewhat reduced— but by no means depleted—when international banks concentrate their subsidiaries in specific geographical regions. The paper also finds a substantial home bias in the international allocation of bank assets, relative to the results of a mean-variance portfolio optimization model. Overall, international diversification gains in banking appear to besubstantial, albeit largely unexploited by current bank expansion strategies. These 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.
JEL Classification Numbers:
G11, G21, E44, F40

Keywords: international banking; home bias; portfolio diversification,Basel II Author’s E-Mail Address: alicia.garcia-herrero@bis.org; fvazquez@imf.org

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Contents

Page

I. Introduction ............................................................................................................................3 II. Data and Stylized Facts .........................................................................................................4 III. BankInternationalization and Risk-Normalized Returns ....................................................8 IV. A Portfolio Approach ........................................................................................................13 V. Concluding Remarks...........................................................................................................17 VI.References..........................................................................................................................18 Tables Table 1. Regional Distribution of Bank Subsidiaries Overseas...............................................22 Table 2. Summary Statistics of Correlations of Selected Macroeconomic Variables Between Groups ofCountries..................................................................................................23 Table 3. Summary Statistics of Returns and Risk by Country Groups....................................24 Table 4. Summary Statistics of Correlations of Selected Macroeconomic Variables Between Groups of Countries..................................................................................................25 Table 5. Average Herfindhal Indexes by Groups of...