Loans and money issues

Asset portfolio diversification theory depends on historic correlations being stable and reflecting some genuine underlying relationship. A high historic correlation on losses in two regions may have been because both regions depended to a large extent on a single, common industry. If that is no longer the case there is no reason to expect past correlations to be a good indicator of future correlations. This same argument can be put for equity holdings in VaR type analysis but a major difference is that the time frames involved in managing market risk are very different from those for credit risk.