Cross-Border Diversification in Bank Asset Portfolios

International Finance, Forthcoming

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

Claudia M. Buch

Deutsche Bundesbank

John C. Driscoll

Federal Reserve Board

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

Federal Reserve Board ( email )

20th and C Streets, 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 ECARES ULB CP 114
B-1050 Brussels
Belgium

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