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Internationalization and bank risk

Allen N. Berger, Sadok El Ghoul, Omrane Guedhami and Raluca Roman ()

No RWP 15-8, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: This paper documents a positive relation between internationalization and bank risk. This is consistent with the empirical dominance of the market risk hypothesis – whereby internationalization increases banks' risk due to market-specific factors in foreign markets – over the diversification hypothesis – whereby internationalization allows banks to reduce risk through diversification of their operations. The results continue to hold following a variety of robustness tests, including endogeneity and sample selection bias. We also find that the magnitude of this effect is more pronounced during financial crises. The results appear to be at least partially explained by agency problems related to poor corporate governance.

Keywords: Corporate governance; Financial crises; Internationalization; Risk (search for similar items in EconPapers)
JEL-codes: G21 G28 L25 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban
Date: 2015-09-03
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Handle: RePEc:fip:fedkrw:rwp15-08