DP12159 European Banks Straddling Borders: Risky or Rewarding?

Author(s): Patty Duijm, Dirk Schoenmaker
Publication Date: July 2017
Keyword(s): Bank Regulation, Financial Stability, Geographical Diversification, International Banking, Risk
JEL(s): E44, G21, G28
Programme Areas: Financial Economics, International Macroeconomics and Finance
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12159

Theory suggests that cross-border banking is beneficial as long as there is a non-perfect correlation across country-specific risks. Using a unique hand-collected dataset with cross-border loans for the 61 largest European banks, we find that cross-border banking in general decreases bank risk, and that the beneficial impact from cross-border banking increases when banks diversify more into countries with dissimilar economic and financial conditions. However, we find that banks do not fully utilize these diversification opportunities as banks mainly invest in countries that are economically more similar to their home country.