DP11951 International Expansion and Riskiness of Banks

Author(s): Ester Faia, Gianmarco Ottaviano, Irene Sanchez Arjona
Publication Date: April 2017
Date Revised: July 2017
Keyword(s): banks' risk, Competition, Diversification, global expansion, regulation., systemic risk
JEL(s): F23, F65, G21, G32
Programme Areas: Financial Economics, International Trade and Regional Economics, International Macroeconomics and Finance
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11951

We exploit an original dataset on European G-SIBs to assess how banks’ internationalization affects risk in the banking sector. We find a robust negative correlation between foreign expansion and banking risk as captured by various individual bank and systemic risk metrics. An IV strategy based on gravity regressions allows us to conclude that in our sample there is strong evidence that banks’ foreign expansion reduces risk, both from an individual bank and a systemic viewpoint. This reduction is associated with better asset diversification with no evidence of any relevant detrimental effect of possible regulatory arbitrage.