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International banking and the allocation of risk

Buch, Claudia M., DeLong, Gayle and Neugebauer, Katja (2007) International banking and the allocation of risk. IAW-Diskussionspapiere (32). InstItut für Angewandte WIrtschaftsforschung, Tübingen, Germany.

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Abstract

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’ pretax 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.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.iaw.edu
Additional Information: © 2007 IAW
Divisions: Systemic Risk Centre
Subjects: H Social Sciences > HC Economic History and Conditions
JEL classification: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E21 - Macroeconomics: Consumption; Saving; Aggregate Physical and Financial Consumer Wealth
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy (Targets, Instruments, and Effects)
Sets: Research centres and groups > Systemic Risk Centre
Date Deposited: 10 Jun 2014 16:35
Last Modified: 20 Oct 2020 23:28
URI: http://eprints.lse.ac.uk/id/eprint/57026

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