Decentralized multinational banks and risk taking: the spanish experience in the crisis

This paper analyses the effects of decentralized multinational banks, characterized by the large autonomy of the affiliates that the banking group has abroad, on bank’s risk, using Spanish confidential supervisory data. Having activity abroad, in countries whose business and financial cycles may be less than perfectly correlated with those of the home country can generate more stability in the results of the consolidated banking group. Such isolation should be greater for multinational and decentralized banks. On the other hand, the international activity of banks may be associated to more risk taking as distance can hinder the ability of a bank’s headquarters to monitor its subsidiaries or because of the more limited knowledge of the host country that the group has. Which effect dominates is an empirical matter which could be taken into account in capital requirements and when carrying out stress-tests. We provide empirical evidence of the relevance of the model of entry into foreign markets, international geographic diversification and business co-movements between the Spanish and the host economy on bank’s ex-post risk. The results are consistent with the hypothesis that geographic diversification reduces risk.