Advanced seminar in Economics - Ester Faia (Goethe University Frankfurt)
"Foreign Expansion, Competition and Bank Risk" and "Global Banking: Endogenous Competition and Risk Taking"
Wednesday 3 October 2018 (11h00 - 12h30) - Extranef - 109
"Foreign Expansion, Competition and Bank Risk"
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.
"Global Banking: Endogenous Competition and Risk Taking"
Direct involvement of global banks in retail activities (‘bricks and mortar’) can reduce
aggregate risk-taking through local competition. We develop this argument in a
dynamic entry model of multinational banks operating in different imperfectly competitive
markets through horizontal expansion of deposit and loan activities. Additional
monitoring costs abroad lead to predatory lending, which in turn reduces firms’ risktaking
if the expansionary impact of competition on banks’ aggregate profits (‘charter
value’) through larger scale is stronger than its contractionary impact through smaller
margins. This is especially so when loan risk is correlated across banks and liquidity
risk is heterogeneous across them (hence exit is also endogenous).