Faculty of Economics and Business Administration Publications Database

Global banking: Endogenous competition and risk taking

Laffitte, Sébastien
Mayer, Maximilian
Ottaviano, Gianmarco
Volume: 133
Pages: 103661 -
Month: 04
ISSN-Print: 0014-2921
Link External Source: Online Version
Year: 2021
Keywords: Global bank; Oligopoly; Oligopsony; Competition; Endogenous risk taking

When banks expand abroad, their riskiness decreases if foreign expansion happens in destination countries that are more competitive than their origin countries. We reach this conclusion in three steps. First, we develop a flexible dynamic model of global banking with endogenous competition and endogenous risk-taking. Second, we calibrate and simulate the model to generate empirically relevant predictions. Third, we validate these predictions by testing them on an original dataset covering the activities of the 15 European global systemically important banks (G-SIBs). Our results hold across alternative measures of individual and systemic bank risk.