Under-Regulated and Over-Guaranteed? International Bank Mergers and Bank Risk-Taking

Abstract:     
Weak bank supervision gives banks the ability to shift risk from themselves to supervisors. One way for banks to take advantage of weak supervisory systems is to engage in risky activities such as cross-border bank mergers. We examine whether the supervisory structure of a country influences the decision to engage in a cross-border merger by looking at the number of such mergers between OECD countries between 1985 and 2001. We also look at the change in risk profile associated with 299 individual mergers. We find that banks expand into countries that provide good business opportunities. However, once a bank decides to expand into a country, the decision to increase or decrease risk appears to be related to its home supervisory structure. Strong supervision - especially fairly priced deposit insurance - appears to mitigate moral hazard.

Keywords: Banks, international financial markets, regulation

JEL Classifications: F36, G15, G21, G28

Working Paper Series