Does diversification contribute to the resiliency of a residential loans guarantee scheme?

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To secure housing loans, French banks mainly rely on the guarantee provided by a residential property loan guarantor. Using an economic capital approach and the data of a major French guarantor from 1997 to 2013, this paper illustrates the ability of a guarantee mutual fund to benefit from diversification effects coming from the heterogeneity across participating banks. While diversification gains appear to be considerable in “normal times”, a fund may nevertheless be exposed to concentration risk, i.e. the concentration of potential losses on a single or a limited number of participating banks. Indeed, results show that the 2008 crisis not only implied an increase in economic capital at the fund level, but that diversification gains merely vanished for some participating banks, leading to a concentration of potential losses. This calls for further analyzing the factors that may explain these observed differences in the sensitivity of participating banks to the deterioration of economic conditions.

Author(s):

Joël Petey    
Strasbourg University & EM Strasbourg Business School
France

Michel Dietsch    
Strasbourg University
France