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Abstract:

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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: F23; F65; G21; G32


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

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.