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.