Working Paper: CEPR ID: DP13150
Authors: Ester Faia; Gianmarco Ottaviano; Sebastien Laffitte
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.
Keywords: banks; risk-taking; systemic risk; geographical expansion; gravity; diversification; competition; regulatory arbitrage
JEL Codes: G21; G32; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Competition Channel (L13) | Impact on Bank Risk (G21) |
| Foreign Expansion (F29) | Systemic Risk influenced by country and business model characteristics (F65) |
| Foreign Expansion (F29) | Bank Risk (G21) |
| Foreign Expansion (F29) | Individual Risk Metrics (C46) |
| Foreign Expansion (F29) | Systemic Risk Metrics (E44) |