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Global banking: risk taking and competition

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  • Ester Faia
  • Gianmarco I. P. 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 I. P. 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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    Cited by:

    1. Claudia M. Buch & Linda S. Goldberg, 2021. "Complexity and Riskiness of Banking Organizations: Evidence from the International Banking Research Network," Staff Reports 966, Federal Reserve Bank of New York.
    2. Faia, Ester & Laffitte, Sébastien & Mayer, Maximilian & Ottaviano, Gianmarco, 2021. "Global banking: Endogenous competition and risk taking," European Economic Review, Elsevier, vol. 133(C).
    3. Müting, Miriam, 2019. "Multinational banking: The crisis and its policy response," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203647, Verein für Socialpolitik / German Economic Association.
    4. Muhammad Surajo Sanusi & Farooq Ahmad, 2019. "Measuring Predictability of Oil and Gas Stock Returns and Performance of Moving Average Trading Rules," Journal of Economics and Financial Analysis, Tripal Publishing House, vol. 3(1), pages 47-70.
    5. Stenbacka, Rune & Takalo, Tuomas, 2019. "Switching costs and financial stability," Journal of Financial Stability, Elsevier, vol. 41(C), pages 14-24.
    6. Müting, Miriam, 2020. "Multinational lending retrenchment after the global financial crisis: The impact of policy interventions," Discussion Papers in Economics 72612, University of Munich, Department of Economics.
    7. Bebbington, Jan & Schneider, Thomas & Stevenson, Lorna & Fox, Alison, 2020. "Fossil fuel reserves and resources reporting and unburnable carbon: Investigating conflicting accounts," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 66(C).

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    More about this item

    Keywords

    global bank; oligopoly; oligopsony; endogenous risk taking; expectation of rents extraction; appetitefor leverage;
    All these keywords.

    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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