Internationalization and Bank Risk

his 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 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.

Keywords: Risk, Internationalization, Banking, Financial Crises, Corporate Governance

JEL Classification: G21, G28, L25

Suggested Citation: Suggested Citation

Berger, Allen N. and El Ghoul, Sadok and Guedhami, Omrane and Roman, Raluca A., Internationalization and Bank Risk (June 1, 2015). Federal Reserve Bank of Kansas City Working Paper No. 15-08, Available at SSRN: https://ssrn.com/abstract=2661740 or http://dx.doi.org/10.2139/ssrn.2661740