Final answer:
International diversification of loans is most effective in reducing a bank's credit risk when the economies of the countries in the loan portfolio do not move in tandem.
Step-by-step explanation:
International diversification of loans can best reduce a bank's overall credit risk if the countries where loans are given have economic cycles that do not move together over time. This is because when one country experiences an economic downturn, it is less likely that other countries in the diversified loan portfolio will experience the same.
This scenario is less risky than clustering loans in a single continent where an economic issue in one country can have repercussions on neighboring economies, potentially leading to simultaneous defaults.
International diversification of loans can best reduce a bank's overall credit risk when the countries where loans are given have economic cycles that do not move together over time.
When a bank loans to countries with different economic cycles, the default rates of borrowers in one country may be balanced out by borrowers in another country with lower default rates. This helps the bank maintain a positive net worth and mitigate the risk of large losses in case of an economic downturn in a specific country or region.
Therefore answer is d. the countries where loans are given have economic cycles that do not move together over time.