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Global Banking: Risk Taking and Competition

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  • Ester Faia
  • Gianmarco Ottaviano

Abstract

Direct involvement of global banks in local retail activities can reduce risk-taking by promoting local competition. We develop this argument through a model in which multinational banks operate simultaneously in different countries with direct involvement in imperfectly competitive local deposit and loan markets. The model generates predictions that are consistent with the foregoing argument as long as the expansionary impact of competition on multinational banks' aggregate profits through larger scale is strong enough to offset its parallel contractionary impact through lower loan-deposit return margin (a result valid with both perfectly and imperfectly correlated loans' risk). When this is the case, banking globalization also moderates the credit crunch following a deterioration in the investment climate. Compared with multinational banking, the beneficial effect of cross-border lending on risk-taking is weaker.

Suggested Citation

  • Ester Faia & Gianmarco Ottaviano, 2017. "Global Banking: Risk Taking and Competition," CEP Discussion Papers dp1471, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp1471
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    More about this item

    Keywords

    global bank; oligopoly; oligopsony; endogenous risk taking; expectation of rents extraction; appetitefor leverage;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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