Internationalization and Bank Risk

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 those for 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. This paper was accepted by Amit Seru, finance.