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Margins of International Banking: Is there a Productivity Pecking Order in Banking, too?

  • Claudia M. Buch
  • Cathérine Tahmee Koch
  • Michael Kötter

Modern trade theory emphasizes firm-level productivity differentials to explain the cross-border activities of non-financial firms. This study tests whether a productivity pecking order also determines international banking activities. Using a novel dataset that contains all German banks’ international activities, we estimate the ordered probability of a presence abroad (extensive margin) and the volume of international assets (intensive margin). Methodologically, we enrich the conventional Heckman selection model to account for the self-selection of banks into different modes of foreign activities using an ordered probit. Four main findings emerge. First, similar to results for non-financial firms, a productivity pecking order drives bank internationalization. Second, only a few non-financial firms engage in international trade, but many banks hold international assets, and only a few large banks engage in foreign direct investment. Third, in addition to productivity, risk factors matter for international banking. Fourth, gravity-type variables have an important impact on international banking activities.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2891.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2891
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