Were Multinational Banks Taking Excessive Risks Before the Recent Financial Crisis?

30 Pages Posted: 12 Sep 2012

See all articles by Azzim Gulamhussen

Azzim Gulamhussen

Vlerick Business School

Carlos Manuel Pinheiro

Universidade Europeia; Caixa Geral de Depósitos; Instituto Universitário de Lisboa - ISCTE-IUL - Business Research Unit, BRU-IUL

Alberto F. Pozzolo

Roma Tre University

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2012

Abstract

The recent financial crisis has clearly shown that the relationship between bank internationalization and risk is complex. Multinational banks can benefit from portfolio diversification, reducing their overall riskiness, but this effect can be offset by incentives going in the opposite direction, leading them to take on excessive risks. Since both effects are grounded on solid theoretical arguments, the answer of what is the actual relationship between bank internationalization and risk is left to the empirical analysis. In this paper, we study such relationship in the period leading to the financial crisis of 2007-2008. For a sample of 384 listed banks from 56 countries, we calculate two measures of risk for the period from 2001 to 2007 – the expected default frequency (EDF), a market-based and forward-looking indicator, and the Z-score, a balance-sheet-based and backward-looking measure – and relate them to their degree of internationalization. We find robust evidence that international diversification increases bank risk.

Keywords: banks, risk, multinational banking, economic integration, market structure

JEL Classification: G21, G32, F23, F36, L22

Suggested Citation

Gulamhussen, M. A. and Pinheiro, Carlos Manuel and Pozzolo, Alberto F., Were Multinational Banks Taking Excessive Risks Before the Recent Financial Crisis? (July 1, 2012). Centro Studi Luca d'Agliano Development Studies Working Paper No. 332, Available at SSRN: https://ssrn.com/abstract=2144754 or http://dx.doi.org/10.2139/ssrn.2144754

M. A. Gulamhussen

Vlerick Business School ( email )

Bolwerklaan 21, 2nd floor Manhattan Center
Sint-Joost-ten-Node
Brussels, 1210
Belgium

Carlos Manuel Pinheiro

Universidade Europeia ( email )

Portugal
+(351)964020997 (Phone)

Caixa Geral de Depósitos ( email )

Av. Joao XXI, 63 2º
Lisbon
P 1000 300
Portugal

Instituto Universitário de Lisboa - ISCTE-IUL - Business Research Unit, BRU-IUL ( email )

Lisboa
Portugal

Alberto F. Pozzolo (Contact Author)

Roma Tre University ( email )

Via Ostiense 163
Roma, RM 00154
Italy

HOME PAGE: http://www.uniroma3.it/

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
129
Abstract Views
895
Rank
219,115
PlumX Metrics