Diversification and determinants of international credit portfolios: Evidence from German banks

Bank credit portfolios are concentrated on relatively few countries despite potential gains from diversifying internationally. Based on unique data for German banks, we examine whether this concentration is due to country-specific frictions that increase the attractiveness of some destinations relative to others. We therefore compare banks' actual portfolios to mean-variance benchmark portfolios that might be observed in the absence of such frictions. Our results show that banks overweight countries with more developed institutions and sound banking regulations. This suggests that improvements and global convergence of institutional frameworks could contribute to more internationally integrated banking markets and more diversified credit portfolios.