The State of Cross-Border Banking in CESEE: Testing the Portfolio Theory View

This paper examines the state of cross-border banking in EU countries localized in Central, Eastern and Southern Eastern Europe (CESEE) and its impact on financial stability. We built on model by Schoenmaker and Wagner (2011) to measure the potential benefits of banking sector diversification level and its development through time period from 2006 to 2013. We use consolidated quarterly data on international bank claims collected from Bank for International Settlements (BIS) to measure the outward and inward integration of country's banking sector. In our hypothesis, we argue that benefits arising from portfolio diversification are a negative function of portfolio size measured by total assets. This hypothesis was tested on the example of the Czech Republic and will be subjected to statistical and econometric verification in further research.