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Global Banking: Endogenous Competition and Risk Taking

Listed author(s):
  • Faia, Ester
  • Ottaviano, Gianmarco

Direct involvement of global banks in local retail activities through a "bricks and mortar" business model can reduce risk-taking by promoting local competition. We develop this argument through a dynamic model in which multinational banks may choose to operate in different imperfectly competitive national markets through the horizontal expansion of their deposit and loan activities. In making this choice, banks compare charter values and entry barriers. When foreign operations entail additional monitoring costs, multinational banks face predatory lending incentives that are stronger the smaller their market shares are. The model generates predictions that are consistent with the "bricks and mortar" argument as long as the expansionary impact of competition on multinational banks’ aggregate future discounted profits through larger scale is strong enough to offset its parallel contractionary impact through lower loan-deposit return margin. This effect is stronger with perfectly than imperfectly correlated loans’ risk, with exogenous than endogenous exit, with horizontal than vertical expansion (cross-border lending).

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 11940.

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Date of creation: Mar 2017
Handle: RePEc:cpr:ceprdp:11940
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  1. Brander, James & Krugman, Paul, 1983. "A 'reciprocal dumping' model of international trade," Journal of International Economics, Elsevier, vol. 15(3-4), pages 313-321, November.
  2. Niepmann, Friederike, 2015. "Banking across borders," Journal of International Economics, Elsevier, vol. 96(2), pages 244-265.
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  6. Raghuram G. Rajan, 2005. "Has financial development made the world riskier?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 313-369.
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  8. David Martinez-Miera & Rafael Repullo, 2010. "Does Competition Reduce the Risk of Bank Failure?," Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3638-3664, October.
  9. Berger, Allen N. & Clarke, George R.G. & Cull, Robert & Klapper, Leora & Udell, Gregory F., 2005. "Corporate governance and bank performance: A joint analysis of the static, selection, and dynamic effects of domestic, foreign, and state ownership," Journal of Banking & Finance, Elsevier, vol. 29(8-9), pages 2179-2221, August.
  10. de Blas, Beatriz & Russ, Katheryn Niles, 2013. "All banks great, small, and global: Loan pricing and foreign competition," International Review of Economics & Finance, Elsevier, vol. 26(C), pages 4-24.
  11. Nicola Cetorelli & Linda S. Goldberg, 2012. "Banking Globalization and Monetary Transmission," Journal of Finance, American Finance Association, vol. 67(5), pages 1811-1843, October.
  12. Martin R. Goetz & Luc Laeven & Ross Levine, 2013. "Identifying the Valuation Effects and Agency Costs of Corporate Diversification: Evidence from the Geographic Diversification of U.S. Banks," Review of Financial Studies, Society for Financial Studies, vol. 26(7), pages 1787-1823.
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