Theory suggests that cross-border banking is beneficial as long as there is a non-perfect correlation across country-specific risks. Using a unique hand-collected dataset with cross-border loans for the 61 largest European banks, we find that cross-border banking in general decreases bank risk, and that the beneficial impact from cross-border banking increases when banks diversify more into countries with dissimilar economic and financial conditions. However, we find that banks do not fully utilize these diversification opportunities as banks mainly invest in countries that are economically more similar to their home country.

Bank Regulation, Financial Stability, Geographical Diversification, International Banking, Risk
Financial Markets and the Macroeconomy (jel E44), Banks; Other Depository Institutions; Mortgages (jel G21), Government Policy and Regulation (jel G28)
hdl.handle.net/1765/105347
Centre for Economic Policy Research {CEPR Discussion Paper Series charges a fee of $5.00 for this paper}
Rotterdam School of Management (RSM), Erasmus University

Duijm, P, & Schoenmaker, D. (2017). European Banks Straddling Borders: Risky or Rewarding? (No. DP12159). CEPR Discussion Paper Series. Retrieved from http://hdl.handle.net/1765/105347