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Abstract:

cover
CEP Discussion Paper
International Expansion and Riskiness of Banks
Irene Sanchez Arjona, Ester Faia and Gianmarco Ottaviano
April 2017
Paper No' CEPDP1481:
Full Paper (pdf)

JEL Classification: F32; G21


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

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.