DP11951 International Expansion and Riskiness of Banks

Author(s): Ester Faia, Gianmarco Ottaviano, Irene Sanchez Arjona
Publication Date: April 2017
Keyword(s): banks’ risk, Competition, Diversification, global expansion, regulation., systemic risk
JEL(s):
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 15 European banks classified as G-SIBs by the BIS to assess whether expansion in foreign markets increases their riskiness, and through which channels that eventually happens. We find that there is a strong negative correlation between bank risk (proxied with CDS price or loan loss provisions) and foreign expansion. The same is true when using systemic risk metrics (marginal expected shortfalls or CoVaR). On the one hand, banks that expand abroad more have lower riskiness so that, given individual bank riskiness, their expansion reduces the (weighted) average riskiness of the banks' pool. On the other hand, foreign expansion of any given bank makes the bank and thus the banks' pool less risky. In terms of the channels, diversification, competition and regulation are all important. Expansion in destination countries with different business cycle co-movement and with stricter regulations than the origin country decreases a bank's riskiness. As for competition, expansion decreases riskiness only when competition in the origin country is less intense than in the destination countries.