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Cross-Border Bank Flows and Systemic Risk

65 Pages Posted: 23 Mar 2017 Last revised: 25 Oct 2017

George Andrew Karolyi

Cornell University - Johnson Graduate School of Management

John Sedunov III

Villanova University - Department of Finance

Alvaro G. Taboada

Mississippi State University

Date Written: October 24, 2017

Abstract

Using data on cross-border bank flows from Bank for International Settlement (BIS) reporting source countries to 114 recipient countries, we find that heightened bank flows are associated with lower systemic risk in the bank systems in the recipient country. The link between increased flows and reductions in marginal expected shortfall (MES) are concentrated among banks that are larger, profitable, and more efficient. The decline in MES is concentrated among banks in developed markets and those in countries with banking sectors that are larger and have lower capital bases. Additional evidence helps to identify the channels through which cross-border bank flows help to reduce MES, which is by improving recipient-country bank asset quality, efficiency, and profitability. Overall, our findings are consistent with dynamic models of multinational banking that predict lower risk-taking by stimulating local competition and suggest a positive impact of international bank flows on global financial stability.

Keywords: Cross-border bank flows, financial institutions, bank regulation, systemic risk, financial crises

JEL Classification: G21, G28, G34, G38

Suggested Citation

Karolyi, George Andrew and Sedunov, John and Taboada, Alvaro G., Cross-Border Bank Flows and Systemic Risk (October 24, 2017). Available at SSRN: https://ssrn.com/abstract=2938544

George Karolyi

Cornell University - Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

John Sedunov (Contact Author)

Villanova University - Department of Finance ( email )

800 Lancaster Ave.
Villanova, PA 19085
United States
610-519-4374 (Phone)

HOME PAGE: http://homepage.villanova.edu/john.sedunov/

Alvaro Taboada

Mississippi State University ( email )

Mississippi State, MS 39762
United States
662-325-6716 (Phone)
662-325-1977 (Fax)

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