Discussion Paper Details

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Title: Foreign Expansion, Competition and Bank Risk

Author(s): Ester Faia, Sebastien Laffitte and Gianmarco Ottaviano

Publication Date: September 2018

Keyword(s): banks' risk-taking, Competition, Diversification, geographical expansion, Gravity, regulatory arbitrage and systemic risk

Programme Area(s): Financial Economics, International Macroeconomics and Finance and International Trade and Regional Economics

Abstract: Using a novel dataset on the 15 European banks classified as G-SIBs from 2005 to 2014, we find that the impact of foreign expansion on risk is always negative and significant for most individual and systemic risk metrics. In the case of individual metrics, we also find that foreign expansion affects risk through a competition channel as the estimated impact of openings differs between host countries that are more or less competitive than the source country. The systemic risk metrics also decline with respect to expansion, though results for the competition channel are more mixed, suggesting that systemic risk is more likely to be affected by country or business models characteristics that go beyond and above the differential intensity of competition between source and host markets. Empirical results can be rationalized through a simple model with oligopolistic/oligopsonistic banks and endogenous assets/liabilities risk.

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Bibliographic Reference

Faia, E, Laffitte, S and Ottaviano, G. 2018. 'Foreign Expansion, Competition and Bank Risk'. London, Centre for Economic Policy Research.