Cross-Border Diversification in Bank Asset Portfolios

International Finance, Forthcoming

36 Pages Posted: 5 Oct 2009 Last revised: 25 May 2010

See all articles by Claudia M. Buch

Claudia M. Buch

Deutsche Bundesbank

John C. Driscoll

Board of Governors of the Federal Reserve System

Charlotte Ostergaard

BI Norwegian Business School, Department of Finance; European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: October 5, 2009

Abstract

We compute optimally diversified international asset portfolios for banks located in France, Germany, Italy, the U.K., and the U.S., using the mean-variance portfolio model with currency hedging. We compare these benchmark portfolios to the actual cross-border asset positions of banks from 1995-2003 and ask whether the differences are best explained by regulations, institutions, cultural conditions, or other financial frictions. Our results suggest that both culture and regulations affect the probability of a country being overweighted in banks’ portfolios: countries whose residents score higher on a survey measure of trust are more likely to be overweighted, while countries that have tighter capital controls are less likely. From a policy standpoint, the importance of culture suggests a limit to the degree of financial integration that may be achieved by the removal of formal economic barriers.

Keywords: International banking, portfolio diversification, international financial integration

JEL Classification: G21, G11, E44, F40

Suggested Citation

Buch, Claudia M. and Driscoll, John C. and Ostergaard, Charlotte, Cross-Border Diversification in Bank Asset Portfolios (October 5, 2009). International Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1483156

Claudia M. Buch

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

John C. Driscoll

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.federalreserve.gov/econresdata/john-c-driscoll.htm

Charlotte Ostergaard (Contact Author)

BI Norwegian Business School, Department of Finance ( email )

Nydalsveien 37
Oslo, 0442
Norway
+4746410520 (Phone)

HOME PAGE: http://home.bi.no/charlotte.ostergaard/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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