International Banking and the Allocation of Risk

Claudia Buch, Gayle L. DeLong and Katja Neugebauer

No 32, IAW Discussion Papers from Institut für Angewandte Wirtschaftsforschung (IAW)

Abstract: Macroeconomic risks could magnify individual bank risk. Mitigating the influence of economy-wide risks on banks could therefore be very important to maintain a smooth-running banking system. In this paper, we explore the extent to which macroeconomic risks affect banks. We use a bank-level dataset on over 2,000 banks worldwide for the years 1995-2002 to study the effect of macroeconomic volatility, the openness of the banking system, and banking regulations on bank risks. Our measure of bank risk is the volatility of banks’ pretax profits. We find that macroeconomic volatility increases banks’ profit volatility and that international openness of the banking system lowers bank risk. We find no impact of banking regulation on profit volatility. Our findings suggest that if policymakers want to lower bank risk, they should seek to lower macroeconomic volatility as well as increase openness in the banking system.

Keywords: international banking; macroeconomic volatility; banking risk (search for similar items in EconPapers)
JEL-codes: F37 F41 G21 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2007-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:iaw:iawdip:32

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