Banks’ pooling of corporate debt: An application of the restated diversification theorem

• The paper analyzes banks’ pooling of corporate debt.
• Sharing rules that are based on loan sizes are found to be Pareto improving.
• Implementation does not require any precise knowledge regarding defaults.

We analyze banks’ pooling of corporate loans and propose Pareto-improving sharing rules that depend only on the relative sizes of the loans. Implementation of these sharing rules do not require any precise knowledge of default probabilities or default correlations.