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Do banks benefit from internationalization? Revisiting the market power-risk nexus


Buch, Claudia M; Koch, Cathérine; Koetter, Michael (2009). Do banks benefit from internationalization? Revisiting the market power-risk nexus. Series 2: Banking and Financial Studies 09/2010, Deutsche Bundesbank.

Abstract

Recent developments on international financial markets have called the benefits of
bank globalization into question. Large, internationally active banks have
acquired substantial market power, and international activities have not
necessarily made banks less risky. Yet, surprisingly little is known about the
actual link between bank internationalization, bank risk, and market power.
Analyzing this link is the purpose of this paper. We jointly estimate the
determinants of risk and market power of banks, and we analyze the effects of
changes in terms of the number of foreign countries (the extensive margin) and
the volume of foreign assets (the intensive margin). Our paper has four main
findings. First, there is a strong negative feedback effect between risk and market
power. Second, banks with higher shares of foreign assets, in particular those held
through foreign branches, have higher market power at home. Third, holding
assets in a large number of foreign countries tends to increase bank risk. Fourth,
the impact of internationalization differs across banks from different banking
groups and of different size.

Recent developments on international financial markets have called the benefits of
bank globalization into question. Large, internationally active banks have
acquired substantial market power, and international activities have not
necessarily made banks less risky. Yet, surprisingly little is known about the
actual link between bank internationalization, bank risk, and market power.
Analyzing this link is the purpose of this paper. We jointly estimate the
determinants of risk and market power of banks, and we analyze the effects of
changes in terms of the number of foreign countries (the extensive margin) and
the volume of foreign assets (the intensive margin). Our paper has four main
findings. First, there is a strong negative feedback effect between risk and market
power. Second, banks with higher shares of foreign assets, in particular those held
through foreign branches, have higher market power at home. Third, holding
assets in a large number of foreign countries tends to increase bank risk. Fourth,
the impact of internationalization differs across banks from different banking
groups and of different size.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:2009
Deposited On:04 Jan 2012 10:59
Last Modified:05 Apr 2016 15:20
Series Name:Series 2: Banking and Financial Studies
Number of Pages:52
Free access at:Official URL. An embargo period may apply.
Official URL:http://www.bundesbank.de/download/bankenaufsicht/dkp/201009dkp_b_.pdf
Related URLs:http://www.econ.uzh.ch/faculty/koch/DiscussionPaper_DoBanksBenefit.pdf
Permanent URL: https://doi.org/10.5167/uzh-54292

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