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International expansion and riskiness of Banks

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  • Faia, Ester
  • Ottaviano, Gianmarco I. P.
  • Sanchez Arjona, Irene

Abstract

We exploit an original dataset on European G-SIBs to assess how expansion in foreign markets affects their riskiness. We find a robust negative correlation between foreign expansion and bank risk (proxied by various individual and systemic risk metrics). Given individual bank riskiness, banks’expansion reduces the average riskiness of the banks’ pool (between effect). Moreover, foreign expansion of any given bank reduces its own risk (within effect). Diversification, competition and regulation channels are all important. Expansion in destination countries with different business cycle co-movement, stricter regulations and higher competition than the origin country decreases a bank’s riskiness.

Suggested Citation

  • Faia, Ester & Ottaviano, Gianmarco I. P. & Sanchez Arjona, Irene, 2017. "International expansion and riskiness of Banks," LSE Research Online Documents on Economics 83615, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:83615
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    File URL: http://eprints.lse.ac.uk/83615/
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    References listed on IDEAS

    as
    1. Cameron,A. Colin & Trivedi,Pravin K., 2013. "Regression Analysis of Count Data," Cambridge Books, Cambridge University Press, number 9781107667273.
    2. Vlachos, Jonas, 2004. "Does Regulatory Harmonization Increase Bilateral Asset Holdings?," CEPR Discussion Papers 4417, C.E.P.R. Discussion Papers.
    3. Giannetti, Mariassunta & Ongena, Steven, 2012. "“Lending by example”: Direct and indirect effects of foreign banks in emerging markets," Journal of International Economics, Elsevier, vol. 86(1), pages 167-180.
    4. Goetz, Martin R. & Laeven, Luc & Levine, Ross, 2016. "Does the geographic expansion of banks reduce risk?," Journal of Financial Economics, Elsevier, vol. 120(2), pages 346-362.
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    12. Arturo Galindo & Alejandro Micco & César Manuel Serra, 2003. "Better the Devil that You Know: Evidence on Entry Costs Faced by Foreign Banks," Research Department Publications 4313, Inter-American Development Bank, Research Department.
    13. 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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    Cited by:

    1. Duijm, Patty & Schoenmaker, Dirk, 2017. "European Banks Straddling Borders: Risky or Rewarding?," CEPR Discussion Papers 12159, C.E.P.R. Discussion Papers.
    2. repec:eee:chieco:v:53:y:2019:i:c:p:106-127 is not listed on IDEAS
    3. repec:unt:jnapdj:v:24:y:2017:i:2:p:1-22 is not listed on IDEAS

    More about this item

    Keywords

    banks' risk; systemic risk; global expansion; competition; diversification; regulation;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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