International Banking and the Allocation of Risk
27 Pages Posted: 2 Jun 2007
Date Written: May 2007
Macroeconomic risks could magnify individual bank risk. Mitigating the influence of economy-wide risks on banks could therefore be very important to maintain a smooth-running banking system. In this paper, we explore the extent to which macroeconomic risks affect banks. We use a bank-level dataset on over 2,000 banks worldwide for the years 1995-2002 to study the effect of macroeconomic volatility, the openness of the banking system, and banking regulations on bank risks. Our measure of bank risk is the volatility of banks' pre-tax profits. We find that macroeconomic volatility increases banks' profit volatility and that international openness of the banking system lowers bank risk. We find no impact of banking regulation on profit volatility. Our findings suggest that if policymakers want to lower bank risk, they should seek to lower macroeconomic volatility as well as increase openness in the banking system.
Keywords: international banking, macroeconomic volatility, banking risk
JEL Classification: F37, F41, G21
Suggested Citation: Suggested Citation