The (Un)Profitability of Bank Internationalization

Abstract

We investigate the impact of internationalization of banks on their performance. Using a novel data set comprising of the world's 46 largest banks spanning 1980-2004, we find that internationalization decreases performance measures as return-on assets or return-on-sales. That negative effect is magnified when controlling for risk or for response time lags. At best, internationalization has a very weak positive effect on performance on a forward-looking performance measure as Tobin's Q. We explain this discrepancy in performance by means of nonparametric tests, and find weak evidence for a nonlinear pattern in which internationalization may deliver value for banks beyond an internationalization threshold of approximately 50 percent.

Keywords: Banking and finance, internationalization, linear probability models, non-parametric analysis

JEL Classification: G21, F23