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Internationalization of Banks: Strategic Patterns and Performance

Editor

Listed:
  • Morten Balling
    ()

Author

Listed:
  • Alfred Slager

Abstract

This essay investigates the relationship between the internationalization of banks, profitability and shareholder value. We argue that in general internationalization has not contributed to profitability, and shareholders have not gained by investing in banks with more international activities. A database with internationalization measures is constructed for the 3 to 5 largest banks in 8 countries between 1980 and 2003, leading to a sample of 44 banks. The transnationality index is calculated for each bank, combining foreign assets, foreign income and foreign staff into one index. To examine the relationship between internationalization and performance, we calculated the difference between foreign and domestic profitability. We also investigate if more internationalization is related to more profitability. The key finding is that foreign profitability tends to be lower than domestic, and a negative relationship exists between total profitability and internationalization. Also, a " J-curve" shape appears, suggesting that up to a certain degree of internationalization (roughly 40% of foreign staff, income and assets), costs tend to outrun benefits. A similar pattern emerges for shareholder return: banks that either strongly or moderately increased their internationalization activities generated the lowest shareholder return as a group, while banks that retreated generated the most. For the future, we identify banks which are likely in the near future to reassess their internationalization strategy, either to develop a business model where internationalization activities are a stable and profitable source of income, or where banks refocus their attention to the domestic banking market.

Suggested Citation

  • Alfred Slager, 2005. "Internationalization of Banks: Strategic Patterns and Performance," SUERF Studies, SUERF - The European Money and Finance Forum, number 2005/4 edited by Morten Balling.
  • Handle: RePEc:erf:erfstu:37
    as

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    References listed on IDEAS

    as
    1. Alan M Rugman, 1976. "Risk Reduction by International Diversification," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, pages 75-80.
    2. Cem Karacadag & Michael W. Taylor, 2000. "The New Capital Adequacy Framework - Institutional Constraints and Incentive Structures," SUERF Studies, SUERF - The European Money and Finance Forum, number 8 edited by Morten Balling.
    3. Adrian E Tschoegl, 1987. "International Retail Banking as a Strategy: An Assessment," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, pages 67-88.
    4. David T. Llewellyn, 2002. "The Future for Small & Regional Banks in Europe," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
    5. Cem Karacadag & Michael W. Taylor, 2000. "The New Capital Adequacy Framework - Institutional Constraints and Incentive Structures," SUERF Studies, SUERF - The European Money and Finance Forum, number 8 edited by Morten Balling, August.
    6. Timothy H. Hannan & Steven J. Pilloff, 2005. "Will the Adoption of Basel II Encourage Increased Bank Merger Activity? Evidence from the United States," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
    7. Daniel Sullivan, 1994. "Measuring the Degree of Internationalization of a Firm," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, pages 325-342.
    8. Ricardo Brogi & Paolo Santella, 2004. "Two New Measures of Bankruptcy Efficiency," SUERF Studies, SUERF - The European Money and Finance Forum, number 2004/6 edited by Morten Balling, August.
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    Citations

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    Cited by:

    1. Keiichi Hori & Hiroshi Osano, 2013. "Managerial Incentives and the Role of Advisors in the Continuous-Time Agency Model," Review of Financial Studies, Society for Financial Studies, pages 2620-2647.

    More about this item

    Keywords

    internationalization; banking; value creation; performance;

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F30 - International Economics - - International Finance - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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