Internationalization and Bank Risk

This 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 – over the diversification hypothesis – whereby internationalization allows banks to reduce risk through increased diversification of their operations. The results continue to hold following a variety of robustness tests, including accounting for endogeneity and sample selection bias. We also find that the magnitude of this difference in risk is more pronounced during financial crises than normal times. Additional results suggest that capital market participants recognize the difference in risk between international banks and purely domestic banks. JEL Classification Codes: G21, G28, L25