25 Jahre IWH

Hinweis
publiziert in: Review of Finance

Do Banks Benefit from Internationalization? Revisiting the Market Power-Risk Nexus

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.

15. September 2010

Autoren Claudia M. Buch C. T. Koch Michael Koetter

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Do Banks Benefit from Internationalization? Revisiting the Market Power–Risk Nexus

Claudia M. Buch C. T. Koch Michael Koetter

in: Review of Finance, Nr. 4, 2013

Abstract

We analyze the impact of bank internationalization on domestic market power (Lerner index) and risk for German banks. Risk is measured by the official declaration of regulatory authorities that a bank is distressed. We distinguish the volume of foreign assets, the number of foreign countries, and different modes of foreign entry. Our analysis has three main results. First, higher market power is associated with lower risk. Second, holding assets in many countries reduce market power at home, but banks with a higher share of foreign assets exhibit higher market power. Third, bank internationalization is only weakly related to bank risk.

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