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.

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Irene Sanchez Arjona, Ester Faia and Gianmarco I. P. Ottaviano

25 April 2017     Paper Number CEPDP1481

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This CEP discussion paper is published under the centre's Trade programme.