WPS5947
Policy Research Working Paper 5947
Is the Financial Safety Net a Barrier
to Cross-Border Banking?
Ata Can Bertay
Asli Demirgüç-Kunt
Harry Huizinga
The World Bank
Development Research Group
Finance and Private Sector Development Team
January 2012
Policy Research Working Paper 5947
Abstract
A bank’s interest expenses rise with its degree of is a sizeable difference, given that the overall mean cost
internationalization, measured by its share of foreign of funds is 3.3 percent. These results can be explained by
liabilities in total liabilities or a Herfindahl index of limited incentives for national authorities to bail out an
international liability concentration, especially if the international bank, as well as an inefficient recovery and
bank is performing badly. The results in this paper resolution process for international banks. In any event, a
suggest that an international bank’s cost of funds raised less reliable financial safety net appears to be a barrier to
through a foreign subsidiary is 1.5–2.4 percent higher cross-border banking.
than the cost of funds for a purely domestic bank. That
This paper is a product of the Finance and Private Sector Development Team, Development Research Group. It is part of
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The authors may be contacted at Abertay@worldbank.org and Ademirguckunt@worldbank.org.
The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development
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Produced by the Research Support Team
Is the Financial Safety Net a Barrier to Cross-Border Banking?1
Ata Can Bertay
World Bank
Asli Demirgüç-Kunt
World Bank
Harry Huizinga
Tilburg University and CEPR
This draft: December 2011
Key words: Bank bailouts, International burden sharing, Cross-border banking
JEL Classification: F36, G21, G28
1
Bertay: World Bank (Abertay@worldbank.org); Demirguc-Kunt: World Bank (Ademirguckunt@worldbank.org);
Huizinga: Tilburg University and CEPR (Huizinga@uvt.nl). We thank Stijn Cleassens, Alex Popov, Alberto
Pozzolo and participants at the conferences on Banking and the Globalization of Finance in May 2011 in
Amsterdam, and on Bank Supervision and Resolution: National and International Challenges in October 2011 in
Vienna for comments and suggestions. This paper’s findings, interpretations, and conclusions are entirely those of
the authors and do not necessarily represent the views of the World Bank, its Executive Directors, or the countries
they represent.
1. Introduction
Regulatory barriers to cross-border banking have been removed around the world. As a
result, banking markets have internationalized, as measured by the external assets and liabilities
of domestic banks as well as by the ownership of banks.2 All the same, banking markets in many
countries continue to be dominated by purely national banks. This suggests that to some extent
effective barriers to cross-border banking still exist. In practice, many banks may fail to
internationalize, as they fear that they will be able to rely less on the financial safety net. This
reflects that countries have a reduced incentive to bail out an international bank, and that
intervention and resolution options to contain losses at international banks may be more limited.
This paper shows evidence that a bank’s cost of funds rises significantly with its degree
of internationalization as indexed by its share of foreign liabilities in overall liabilities, consistent
with a less reliable financial safety net for cross-border banks. Our benchmark estimation
suggests that an international bank’s cost of funds raised through a foreign subsidiary is between
1.5% and 2.4% higher than the cost of funds for a purely domestic bank, which is a sizeable
difference given an overall mean cost of funds of 3.3% in our sample. Moreover, the interest
expenses of banks with large foreign liabilities are relatively more sensitive to bank performance
as indexed by bank profitability, suggesting effective market discipline of cross-border banks.
Additional evidence of higher interest expenses for international banks is found when we
use alternative measures of bank internationalization. Specifically, interest expenses decline with
the Herfindahl index of international liability concentration, and they decline relatively more
with profitability for banks that own subsidiaries in more foreign countries.
2
See Allen et al. (2011, Table 1.1) for information on the development of cross-border banking in Europe as
measured by the external assets and liabilities relative to GDP.
2
Our finding that cross-border banks face higher interest expenses, especially if they are
performing badly, is consistent with a reluctance on the part of national authorities to contribute
to the bailout of a cross-border bank. Freixas (2003) provides a theoretical modeling of
incentives to engage in fiscal burden sharing to resolve a cross-border bank failure.
Recapitalizing a distressed international bank is taken to be costly relative to simply liquidating
the bank. The benefits of recapitalizing the bank, however, are dispersed over the countries
where the bank operates. For the bank to be recapitalized, the concerned countries have to
collectively share the cost. Contributing to this cost is an international public good.
Underprovision of this public good may result in liquidation of the bank in equilibrium, despite
the fact that the summed international benefits of recapitalization exceed its cost.3 Possible
international coordination failure at the recapitalization stage in case of a cross-border bank, as
modeled by Freixas (2003), may cause bank liability holders to charge higher interest rates to
cross-border banks. As a related issue, national authorities may have limited legal options to
resolve distress at an international bank in a quick and cost-effective manner to contain the joint
losses of national financial safety nets and bank liability holders, resulting in higher expected
losses for bank liability holders.
Alternatively, international banks may have higher interest expenses due to a lack of
international cooperation in the regulatory treatment of solvent banks. Bank regulators, in
particular, may fail to exchange relevant supervisory information, making it difficult to monitor
international banks properly. Also, some countries engage in ring-fencing, i.e. they impose
restrictions on profit or capital transfers among a parent banks and its subsidiaries located in
3
Building on Freixas (2003), Goodhart and Schoenmaker (2009) consider whether some simple international burden
sharing rules would, if adhered to, lead countries to recapitalize banks with a particular international structure.
3
different jurisdictions (see Cerutti, Ilyina, Makarova, and Schmieder, 2010). This increases the
fragility of individual parts of an international banking group potentially giving rise to higher
interest expenses.4 Furthermore, international differences in bank regulation – in part reflecting
regulatory competition - may give rise to regulatory arbitrage by cross-border banks, enabling
them to take on more risk leading to higher interest expenses. Houston, Lin and Ma (2011) find
evidence that banks have transferred funds to markets with fewer regulations.
Cross-border banking entails various costs and benefits unrelated to the financial safety
net and to bank regulation. A policy-related cost of cross-border banking is posed by
international double taxation of a bank’s foreign-source income (see Huizinga, Voget and
Wagner (2011)). Also on the cost side of expansion abroad, Berger, DeYoung, Genay, and Udell
(2000) show that foreign banks tend to be less efficient than domestic banks, with foreign banks
with a US parent bank being an exception. International expansion only makes sense for a bank,
if this generates sufficient benefits to exceed these various costs. The benefits of cross-border
banking potentially include being able to serve internationally active customers, asset
diversification gains, economies of scale, access to agglomeration benefits in international
financial centers, and international regulatory arbitrage (see Claessens and Van Horen (2009),
Committee on the Global Financial System (2010), and McCauley, McGuire and von Goetz
(2010)). Garcia-Herrero and Vazquez (2007) specifically find that international banks attain
higher risk-adjusted returns attributed to diversification gains.
In our regressions, we find a positive and significant relationship between a bank’s
foreign liabilities share and its interest expenses when we control for bank asset risk as
4
Risk for liability holders at foreign subsidiaries similarly increases if the parent bank can decide to ‘cut loose’ a
subsidiary in case it experiences distress. Dermine (2006) reports that Bank of Nova Scotia and Crédit Agricole
abandoned insolvent subsidiaries in Argentina.
4
potentially affected by international regulatory arbitrage and by international risk diversification.
Our result of strong market discipline of internationalized banks is subjected to three further
robustness checks.
First, we acknowledge that a bank’s internationalization decision is potentially
endogenous to its interest expenses. A bank that is unexpectedly confronted with high interest
expenses may, for instance, reduce its degree of internationalization as a way to bring its interest
expenses back down. Endogeneity of this kind may dampen our estimated effect of bank
internationalization on bank interest expenses. To control for this, we apply instrumental variable
estimation to our interest expense equations, using indices of country-level international
economic integration as instruments for bank-level internationalization. Our instruments, in
particular, relate to tourism, foreign direct investment (FDI), international trade, and
international portfolio investment. This approach is motivated by a literature that explains cross-
border banking bilaterally on the basis of FDI, international trade, and other determinants (see
Grosse and Goldberg (1991), Brealey and Kaplanis (1996), and Focarelli and Pozzolo (2005)).
As expected, our instrumental variables results show a stronger impact of bank
internationalization on bank interest expenses.
Second, we consider whether bank liability holders exercise market discipline on cross-
border banks through the interest costs of the unconsolidated parent of a multinational bank. The
unconsolidated parent bank may be relatively exposed to the risk of a less reliable financial
safety resulting from the international expansion of the overall bank, as this part of the bank is
likely to receive bailout support only from the parent country authorities in case of distress. We
indeed find that the sensitivity of the cost of funds of the unconsolidated parent bank to overall
5
bank performance rises relatively much with overall bank internationalization, as evidence of a
reduced reliance on the financial safety net of especially the unconsolidated parent.
Third, we examine whether bank liability holders discipline cross-border banks through
reduced deposit growth rates (of the consolidated bank). We find some evidence that cross-
border banks experience lower deposit growth rate. This evidence is obtained in specifications
that contain bank fixed effects, but it is not robust to eliminating them.
This paper contributes to an extensive literature on market discipline of banks. Flannery
and Sorescu (1996) find that spreads on bank subordinated debentures reflect bank risk relatively
more during the last three years of the 1983-1991 period, following policy changes that increased
the default risk on subordinated bank debentures. For European data over the 1991-2001 period,
Sironi (2003) instead finds that spreads on bank subordinated notes and debentures are relatively
insensitive to bank risk in the second part of the 1990s, which is attributed to a disappearing
perception of safety net guarantees on the part of investors. Park and Peristiani (1998) show that
riskier thrifts in the US pay higher interest rates, and attract smaller amounts of uninsured
deposits. Goldberg and Hudgins (2002) similarly find that failed banks exhibit declining
proportions of uninsured deposits to total deposits prior to failure. Billet, Garfinkel, and O’Neal
(1998) conclude that market discipline by uninsured depositors may be ineffective, as riskier
banks are able to increase their use of insured deposits. Demirgüç-Kunt and Huizinga (2004)
show evidence that a system of explicit deposit insurance weakens market discipline of banks by
depositors using data for around 80 countries, although Martinez Peria and Schmukler (2001)
6
find no evidence of this using data for Argentina, Chile, and Mexico during the 1980s and
1990s.5
The remainder of this paper is organized as follows. Section 2 discusses the data, and in
particular our measures of bank internationalization. Section 3 presents the results on the impact
of bank internationalization on the interest market discipline by depositors through banks’
funding costs and deposit growth rates. Section 4 concludes.
2. The data
In this paper, we examine an international sample of 898 banks located in 83 countries
for the period 1999-2009. Income statement and balance sheet information on individual banks is
taken from the Bankscope database.6 In addition, Bankscope provides a bank’s significant
shareholdings in other banks, if any. Using this information, we can match owning banks with
directly owned banks. To ensure data quality, we only include owning banks that report some
ownership data in a given year and are publicly listed. In addition, we require the owning bank to
have a consolidated balance sheet in Bankscope so that we are able to measure the size of owned
banks relative to the size of the consolidated owning bank.
In this paper, we are interested in seeing whether international banks can rely relatively
less on the financial safety net in their countries of operation. For this purpose, we construct
5
Several studies examine whether a bank’s size reduces market discipline, as a large bank may be deemed too big to
fail. Kane (2000) considers US bank mergers, finding that stockholders of large-bank acquirers have gained value
when a deposit institution target is large and even more value when a deposit institution target was previously
headquartered in the same state. Benston, Hunter and Wall (1995) similarly find that bank mergers and acquisitions
are in part motivated by enhancing the deposit insurance put option. Penas and Unal (2004) consider the returns to
bond holders around US bank mergers, finding that adjusted returns on merging banks’ bonds are positive across
pre-merger and announcement months
6
We compile time series information on ownership relationships using Bankscope’s yearly CDs from 1999 to 2008,
while ownership data for 2009 are gathered from Bankscope as available through the Wharton Research Data
Services (WRDS).
7
several indices of bank internationalization for parent banks. These internationalization indices
pertain to foreign subsidiaries and not to foreign branches, as information on foreign branches is
not available from Bankscope. Furthermore, we only use information on directly owned foreign
subsidiaries. Thus, our internationalization measures to some extent undermeasure the size and
complexity of a bank’s foreign operations.7
First, we consider internationalization as indicated by the extent to which a bank’s
liabilities are foreign. Banks with large foreign liabilities potentially receive lower bailout
benefits. We focus on bank liabilities, as these are commensurate to the potential size of bank
bailouts. Foreign liability share, specifically, is constructed as the ratio of the sum of all foreign
subsidiaries’ liabilities, weighted by the parent bank’s ownership share, to the consolidated
liabilities of the parent firm. The mean value of the foreign liabilities share is 1.9% for the
samples of all banks as seen in Table 1, and it is around 5.4% for the sample of only international
banks.8 Figure 1 plots the distribution of the foreign liabilities share for only banks with at least
some foreign liabilities, which constitute 34.8% of the overall sample. Among these banks,
55.5% are seen to have a foreign liabilities share of less than 2.5%.
As an alternative internationalization measure, we consider the level of concentration of
the overall bank’s liabilities among the countries where the parent bank has some liabilities. A
7
For the EU, the European Central Bank (2010, Tables 11 and 13) reports that the total assets of foreign intra-EU
branches of EU banks amounted to 3.3 trillion euros in 2008, while total assets of foreign intra-EU subsidiaries of
EU banks were 4.6 trillion euros in that year. Foreign subsidiaries thus represent 58% of the assets of intra-EU
foreign bank establishments. Our data do not appear to undermeasure the overall importance of foreign subsidiaries
in the EU. The ECB data for the EU, in particular, allow us to calculate a foreign subsidiary assets share relative to
the total assets of credit institutions of 14.1%, while our Bankscope data yield a comparable foreign subsidiary
assets share relative to the consolidated assets of banks of 13.1%. Our focus on banks also implies that we ignore the
non-bank subsidiaries that banks tend to have (see Herring and Carmassi, 2010, p. 209).
8
The calculated value of the foreign liabilities share potentially exceeds 1, as some foreign subsidiaries may have
internal debt to the parent bank. Indeed, there are very few observation of the foreign liabilities share exceeding 1,
and this variable reaches a maximum of 1.64 in our sample.
8
bank with highly concentrated bank liabilities can expect higher bailout benefits, as there is less
of a free-rider problem if only one or a few countries can be expected to pay for a bailout. As our
concentration variable, we take a Herfindahl index of the concentration of bank liabilities among
all countries where the parent bank operates, including the parent bank’s country of residence.
Specifically, concentration is constructed as the sum of the squared shares of a parent bank’s
liabilities in each of the countries where it operates. For this purpose, a parent bank’s share of
liabilities in a foreign country is the sum of the liabilities of all foreign subsidiaries in that
country weighted by the parent bank’s ownership share, divided by the parent bank’s
consolidated liabilities. The share of liabilities for the parent country is equal to 1 minus the
ownership-weighted liability share for all the foreign countries. For a domestic bank,
concentration has a value of 1, and Table 1 correspondingly shows that concentration has a
maximum value of one. The mean value of concentration is 0.967, which reflects that most banks
have liabilities highly concentrated in a single country, mostly the parent country. The minimum
value of concentration is 0.271 for a bank with liabilities that are highly dispersed
internationally. Figure 2 displays the distribution of the concentration variable.9
Finally, we consider several alternative internationalization variables based on the
number of countries in which an owning bank operates. Among these, international is a dummy
variable that takes on a value of 1, if a bank has an ownership share of at least 50% in at least
9
Both the foreign liabilities share and concentration are based on a foreign subsidiary’s liabilities weighted by the
parent bank ownership share. Alternatively, we considered constructing analogous internationalization variables that
take into account fully the liabilities of only majority-owned foreign subsidiaries. These alternative
internationalization variables turn out to be highly correlated to the ones based on weighted ownership shares.
Specifically, the correlations between the two foreign liabilities shares and the two concentration variables are
0.835, and 0.969, respectively. Given these high correlations, we only consider internationalization variables based
on weighted ownership shares in this paper.
9
one foreign subsidiary. Table 1 shows that 27.0% of banks are international by this measure. The
variable countries is the number of countries in which a parent bank has a majority ownership
stake in a bank, including the parent county. This variable has a mean of 1.540 and a maximum
of 22, as seen in Table 1. Figure 3 displays the distribution of the countries variable for the
sample of international banks. Most of these banks are active in only one or a few foreign
countries, but there are 127 observations (from 36 banks) with majority-owned banks in 5 or
more countries, including the parent country. As an alternative, we will also consider the log of
the number of countries where a bank operates. This variable has a mean of 0.267.
In the empirical part, we examine whether internationalization affects market discipline.
Depositors and other bank liability holders can impose market discipline on a risky bank
resulting in a higher interest expenses on bank liabilities. Our main interest expense variable is
constructed as the ratio of interest expenses to total liabilities at the consolidated bank level. This
variable reflects potential stresses at the group level as well the bank’s overall access to the
financial safety net in the countries where it operates. Alternatively, we consider interest
expenses relative to total liabilities at the level of the unconsolidated parent bank. The
unconsolidated parent bank is possibly also affected by stresses anywhere in the international
banking group, but it primarily has to rely on the financial safety net of the parent country. The
mean values of the interest expense ratios at the consolidated and unconsolidated levels are 0.033
and 0.039, respectively. In a robustness check, we also consider whether market discipline gives
rise to lower growth rates of deposits at internationalized banks. The deposit growth rate, which
is computed as the annual rate of real growth of deposits in percent, has a mean value of 0.089 in
the sample.
10
Stronger market discipline should be applied to banks that are at greater risk of failure.
Underperforming banks should be especially at risk. Thus, our main index of failure risk is a
bank’s profitability rate, constructed as the ratio of pre-tax profits over total asset and lagged one
period to reduce endogeneity concerns. The profitability variable has a sample mean of 0.013.
Alternatively, we consider an index of bank risk measuring bank asset volatility. Specifically,
bank asset volatility is the delevered standard deviation of bank stock returns, or more precisely
the annualized standard deviation of bank stock returns multiplied by the ratio of the market
value of common equity to the imputed market value of assets, computed as the book value of
assets plus the market value of common equity and minus the book value of common equity (see
Nikolova, 2003).
The empirical work includes several bank-level and country-level control variables.
Banks that are large in absolute terms – or relative to their national economies – may face lower
interest expenses on account of being too-large-to-fail, or alternatively pay higher interest rates if
they are too-big-to-save. To control for a bank’s absolute size, we include the assets variable,
constructed as the log of total bank assets, with a mean value of 22.9. To represent a bank’s
relative size, the liabilities over GDP variable is computed as the ratio of a bank’s total liabilities
to GDP, with a mean value of 0.098. Further, overhead is the ratio of personnel and other non-
interest expenses to total assets with a mean value of 0.028, and short term debt is short term
debt divided by total liabilities with a mean of 0.815. Our macroeconomic control variables are
consumer price inflation, the growth rate of real GDP per capita, GDP per capita in thousands of
constant 2000 US dollars, and inflation difference constructed as the average foreign-country
inflation rate weighted by the bank’s foreign liabilities minus the inflation rate in the parent
country.
11
Finally, there are four indices of country-level economic integration that are used as
instruments for bank-level internationalization. First, tourism is the total number of tourist
arrivals in and departures from a country normalized by its population with a mean of 0.789.
Second, FDI stands for foreign direct investments flows, both inward and outward, relative to
GDP with a mean of 0.054. Third, openness is sum of imports and exports over GDP with a
mean of 0.539. Fourth, portfolio position stands for the stocks of inward and outward portfolio
investments of a country divided by its GDP with a mean of 0.994.
To conclude this section, Table 2 provides pairwise correlations between our
internationalization variables, and the interest expense and deposit growth variables. The
correlation between the consolidated interest expense variable and the foreign liabilities share is
positive and significant at 1%, while the correlation between consolidated interest expense and
liability concentration is negative and significant at 1%. Further, consolidated interest expense is
positively correlated with the international dummy, the number of countries, and the log of the
number of countries, all with significance levels of 1%. These correlations are all consistent with
a more fragile financial safety net for internationalized banks. Correlations between
unconsolidated interest expense and the internationalization variables, instead, are statistically
insignificant throughout. Also, correlations between consolidated deposit growth and
internationalization variables are insignificant, whereas the bank internationalization variables
are significantly correlated among themselves, as expected.
3. Empirical results on internationalization and market discipline
In this section, we present empirical results on the market discipline of internationalized
banks. To start, section 3.1 presents results of regressions that relate a bank’s consolidated
12
interest expenses to measures of bank internationalization and to bank profitability as an index of
bank performance. Next, in section 3.2 we consider the possibility that consolidated interest
expenses are endogenous to bank internationalization. In particular, we present regressions
where we include lagged values of our internationalization measures, and where we instrument
for bank internationalization using indices of a country’s international economic integration.
Section 3.3 examines how the relation between consolidated interest expenses and bank
internationalization is affected by bank asset volatility to reflect bank risk. Finally, section 3.4
presents results on bank internationalization and market discipline through the parent bank’s
unconsolidated interest expenses and the consolidated bank’s deposit growth rate.
3.1. Interest expenses and internationalization
In this subsection, we first relate a bank’s consolidated interest expenses to its foreign
liabilities share, and subsequently to other indicators of bank internationalization. The basic
estimating relationship between consolidated interest expenses, the bank’s foreign liabilities
share, and its profitability to represent bank performance is as follows:
Interest expenseijt = αj + yt + β1Foreign liabilities shareijt +
β2 Profitijt-1 * Foreign liabilities shareijt + β3 Bankijt + β4 Countryjt + εijt
where the subscripts i, j, and t denote the bank, the country, and the year, and αj and yt are
country and year fixed effects. Further, Bankijt is a set of bank variables including lagged bank
profitability and Countryjt is a set of macroeconomic variables.
The coefficient β1 reflects the effect of bank internationalization per se (as proxied by the
foreign liabilities share) on interest expenses. Importantly, bank internationalization potentially
reduces a bank’s access to the financial safety net, leading to higher interest expenses.
13
Banks expand abroad presumably to become more profitable and/or to mitigate (stand-
alone) bank risk.10 We control for these channels by which internationalization may affect
interest expenses by including the lagged profit variable and, in some specifications, the bank
asset volatility variable in the regressions.
The coefficient β2 captures whether the relationship between interest expenses and a
bank’s foreign liabilities share depends on its performance, as proxied by the lagged bank
profitability variable. In particular, a negative estimated coefficient β2 indicates that bank interest
expenses rise relatively much with the foreign liabilities share for badly performing banks, i.e.
banks with low profitability. Badly performing banks stand a greater chance of bank distress and
of needing to access the financial safety net. Thus, a negative value of β2 suggests that banks
with a high foreign liabilities share can expect less from the financial safety net in case they
become distressed.
In Table 3 we report interest expense regressions including the foreign liabilities share,
country and year fixed effects and with standard errors clustered at the bank level. To start,
regression 1 include the foreign liabilities share itself but not its interaction with profitability.
The foreign liabilities share obtains a positive coefficient that is statistically insignificant.
Regression 2 in addition includes an interaction of the foreign liabilities share and profitability
yielding positive and negative coefficients that are both statistically insignificant.
As seen in Figure 1, the distribution of the foreign liabilities share mostly shows low
values, with several significantly higher values. Therefore, the estimation could primarily be
driven by a relatively small number of outliers. To control for this, regressions 3 and 4 exclude
10
Garcia-Herrero and Vazquez (2007) find that international banks attain higher risk-adjusted returns attributed to
diversification gains. Amihud, DeLong, and Saunders (2002) find that cross-border mergers neither increases nor
decreases the acquiring bank’s risk.
14
observations of the foreign liabilities share exceeding 0.3, while they are otherwise analogous to
regressions 1 and 2. In regression 3, the foreign liabilities variable obtains a coefficient of 0.020
that is significant at the 10% level. In regression 4, the foreign liabilities share obtains a positive
coefficient of 0.040 that is significant at 1%, while its interaction with profitability obtains a
negative coefficient of -1.491 that is significant at 1%.
The relation between interest expenses and the foreign liabilities share could be
nonlinear. A low level of foreign liabilities, in particular, may increase interest expenses
relatively much, as it introduces the complication of an international financial safety net
coverage. To test this, regressions 5 and 6 include a squared foreign liabilities share variable
starting from regressions 1 and 2. In regression 5, the coefficient for the foreign liabilities share
is estimated to be 0.021 and significant at 10%, while the coefficient for the squared foreign
liabilities share variable is negative and statistically insignificant. In regression 6, the foreign
liabilities share and its interaction with profitability are estimated to be positive and negative at
the 5% level, while the squared foreign liabilities and its interaction with profitability are
estimated with insignificant coefficients.
A bank’s consolidated interest expenses may rise mechanically with its foreign liabilities
share if the general rate of interest in the foreign countries where it operates is higher. To control
for this possibility, regression 7 and 8 include the Foreign liabilities share*Inflation difference
interaction variable in regressions 1 and 2, where inflation difference is the difference between
the foreign-liabilities weighted foreign inflation rate and the parent-country inflation rate. We
expect this control variable to obtain a positive coefficient, as banks that venture into high-
inflation countries are likely to raise some local-currency funds in these countries. In regressions
7 and 8, this control variable obtains positive coefficients that are significant at 1%. The foreign
15
liabilities variable obtains a coefficient of 0.015 in regression 7 that is significant at 5%. This
estimated coefficient is somewhat higher than the corresponding estimate of 0.012 in regression
1, which reflects that banks tend to raise foreign liabilities in countries with average inflation
rates that are slightly lower than the parent-country inflation rate.11 In regression 8, neither the
foreign liabilities share nor its interaction with bank profitability obtain statistically significant
coefficients.
Finally, regressions 9 and 10 add the Foreign liabilities share*Inflation difference
variable to regressions 5 and 6, which include squared terms in the foreign liabilities share. In
regression 10, the linear and squared foreign liabilities variables enter with positive and negative
coefficients that are significant at 1% and 5%, respectively. Their interactions with profitability
obtain coefficients with opposite signs that are also significant at 1% and 5%. Together these
results suggest that consolidated interest expenses rise with the foreign liabilities share at a
decreasing rate, especially for banks with low profitability. This is strong evidence that
international banks, and especially badly performing ones, experience market discipline through
higher consolidated interest expenses.
We can use the estimated coefficients in regression 10 to evaluate the economic
significance of the impact of the foreign liabilities share on bank interest expenses. Specifically,
a one-standard deviation increase in the foreign liabilities share of 0.065 (evaluated mean
profitability of 0.013, mean inflation difference of -0.008, and mean foreign liabilities share of
0.019 from Table 1) is estimated to increase the interest expense by 0.00183 or 0.183% [ =
(0.063 -2.278*0.013 - 0.180*2*0.019 + 11.134*2*0.019*0.013 - 0.489*0.008)*0.065) ]. This is
equivalent to a share of 0.00183/0.024, or 7.6%, of the standard deviation of the interest variable,
11
The inflation difference variable has a negative mean of -0.008 as seen in Table 1.
16
which is 0.024 from Table 1. Thus, variation in the foreign liabilities share can explain only a
small part of the variation in bank interest expenses. This is not surprising, as most banks are
purely domestic and even most international banks have predominantly domestic liabilities.
Perhaps a more meaningful way to assess the impact of internationalization on interest
costs is to compare the absolute cost of funds for an internationalized bank to the cost of funds
for a similar, purely domestic bank. Across regressions 3, 5, 7, and 9, we obtain significant
coefficients on the linear foreign liabilities share that range from 0.015 to 0.024. This suggests
that the (marginal) cost of foreign liabilities is between 1.5% and 2.4% higher than the cost of
funds for a purely domestic bank, which is a material difference given an overall mean interest
expense of 3.3% from Table 1.12
By implication, the interest expense ratio is estimated to be between 8 and 13 basis points
higher for the average internationalized bank with a foreign liabilities share of 5.4%. For
comparison, using ratings information Ueda and di Mauro (2010) estimate that protected banks
in G20 countries and in Spain and Switzerland received interest subsidies in the range of 10-50
basis points in 2007 on account of their too-big-to-fail status. These various estimates together
suggest that protected banks around the world are subsidized by the financial safety net due to
too-big-to-fail considerations, even if internationalization per se increases bank interest expenses
on account of a relatively less reliable financial safety net for international banks.
In Table 4 we present regressions where we replace the foreign liabilities share with one
of several other internationalization measures. Regressions 1 and 2 include the foreign liability
12
Perhaps this is an overestimate, as our estimation suffers from a left-out-variable bias caused by a lack of data on
a bank’s foreign liabilities through its foreign branches. In the EU, the average bank’s foreign liabilities through its
foreign subsidiaries represent about 58% of its total foreign liabilities (see footnote 7). This suggests that the
marginal cost of foreign liabilities could be in a lower 1.0% to 1.6% range, if we assume that foreign liabilities
through foreign branches and subsidiaries are highly correlated and that they lead to similar market discipline
through higher interest expenses.
17
concentration ratio, and are otherwise analogous to regressions 1 and 2 of Table 3. In regression
2, the concentration variable obtains a negative and significant coefficient, consistent with the
view that banks with internationally more concentrated liabilities face lower interest expenses
because they can rely more on the financial safety net. Regression 3 and 4 include the
international dummy variable, yielding a negative and significant interaction term of the
international dummy and bank profitability, as evidence that banks with at least one majority-
owned foreign subsidiary and low profitability face higher interest costs. Regressions 5-6 and 7-
8 include the number of countries and its log, respectively. In regressions 6 and 8, the interaction
terms of the included internationalization measure and bank profitability obtain negative
coefficients that are significant at 10% and 1%, respectively. This indicates that banks with
operations in many countries and low profitability pay higher interest expenses, consistent with
view that such banks are subject to a less dependable financial safety net. Overall, the results of
Table 4 provide further evidence that internationalized banks are subject to enhanced market
discipline through higher consolidated interest expenses, especially if they are performing badly.
Next, we consider whether the main results of Tables 3 and 4 are robust to including bank
fixed effects, instead of country fixed effects. In particular, Table 5 re-estimates regressions 1-4
of Table 3 and the regressions of Table 4 for the case where we include bank fixed effects. The
foreign liabilities share is positive and significant at the 5% or 10% level in regressions 1-4, and
the concentration variable is negative and significant at 10% and 5% in regressions 5-6,
consistent with effective market discipline on internationalized banks. However, the log of the
number of countries is negative and significant at 10% in regression 11, running counter to the
idea that internationalized banks pay higher interests, but this variable is insignificant in
regression 12, which includes an interaction term of the log of the number of countries with
18
profit. In regression 12, this interaction term obtains a negative and significant coefficient,
suggesting that it is appropriate to include this interaction term.
The signs of estimated coefficients for interaction terms of the included
internationalization variable and bank profitability in the table are all consistent with effective
market discipline of internationalized banks with low profitability, and they are statistically
significant (except in regression 2 where the interaction of the foreign liabilities share and bank
profitability obtains a negative coefficient that is marginally insignificant at 10%, with a p-value
of 0.106). Comparing regressions 3 in Table 3 and 5, we see that the foreign liabilities share
obtains coefficients of 0.020 and 0.021 that are of comparable size.
Overall, the results in Tables 3-5 suggest that internationalized banks pay significantly
higher interest expenses, especially if they are badly performing. This is evidence that liability
holders of internationally active banks expect relatively large losses to materialize. This is
consistent with the view that international bank bailouts are a public good, to which national
financial safety net managers contribute reluctantly. Alternatively, financial safety net managers
may have difficulty intervening at a distressed international bank quickly even if they cooperate,
with the potential for losses to liability holders to magnify.
3.2. Endogeneity issues
Our results so far suggest that bank internationalization leads to higher consolidated
interest expenses. This implies that an international bank that faces high interest expenses may
be able to reduce these by lowering its degree of internationalization. Thus, higher interest
expenses may trigger a reduction in internationalization, making internationalization endogenous
to interest expenses. If so, the estimated impact of our internationalization measures on interest
19
expenses may be biased downward in absolute terms. This section presents the results from two
approaches aiming to deal with possible endogeneity. First, we present a set of interest expense
regressions where we replace the included internationalization measure by its lagged value,
reducing the potential for reverse causation. Second, we estimate IV regressions where we use
indices of international economic integration at the country level to instrument for bank-level
internationalization. Measures of country-level economic integration are positively correlated
with measures of bank-level internationalization, but they are unlikely to be affected by the level
of bank interest expenses, and hence are likely to be appropriate instruments.
To start, Table 6 present results of interest expense regressions analogous to Table 5
where the included internationalized measure has been lagged one year, reducing the sample by
about a third. The regressions include county fixed effects, and control for clustering of the
errors at the bank level. In regressions 3 and 4, the lagged foreign liabilities share obtains
coefficient of 0.025 and 0.031 that are significant at the 5% and 10% level, respectively, and
slightly larger and smaller than the estimated coefficients of 0.020 and 0.040 in regressions 3 and
4 of Table 3. In regression 6, we see that interest expenses are negatively and significantly
related to the lagged concentration variable, with a coefficient that is slightly more negative than
the corresponding coefficient in regression 2 of Table 4. Further, there are negative and
significant interaction terms of the lagged foreign liabilities share variable and the profit variable
in regression 2, and of the lagged international variable with the profit variable in regression 8,
consistent with a reduced reliance on the financial safety net by internationalized banks. Overall,
the results of Table 6 suggest a positive impact of bank internationalization on bank interest
expenses after we lag the internationalization variables, while the magnitude of the effect is
similar to Tables 3 and 4.
20
Next, we use an instrumental variable approach to control for the possible endogeneity of
interest expenses. As instruments for our bank-level internationalization indices, we use four
measures of country-level international economic integration: the number of tourist arrivals and
departures over total population, the sum of inward and outward FDI over GDP, exports plus
imports over GDP, and the sum of portfolio-investment assets and liabilities over GDP. We use a
country fixed-effects model with two-step GMM estimation clustering standard errors at the
bank level. Exploiting the Frisch-Waugh-Lovell (FWL) theorem set out in Lovell (1963), we
partial out the country fixed effects and the constant without affecting the estimation of the
coefficients for the remaining regressors.
The IV estimation is applied to the interest expense specifications of Table 5 with country
fixed effects. All the instruments are expected to have a positive impact on bank
internationalization indices (with the exception of concentration), as banks in internationally
integrated economies should internationalize more. The estimated coefficients from the first-
stage regressions provided in Table 7 tend to confirm this expectation, as the instruments
generally obtain positive signs. The instruments do not individually have high levels of
significance except FDI, which is statistically significant in all first-stage regression except
regression 10, but together the instruments suffice to identify the various internationalization
measures. The joint significance tests for excluded instruments are rejected for all regressions at
minimally the 5% level, with p-values presented in the table. The first-stage regressions for the
interaction terms of an internationalization variable with profit also perform well (unreported).
Underidentification does not seem to be a problem, as all regressions in the table pass
underidentification tests with at least 10% significance.
21
Our instruments reflect country-level economic integration, and there is no obvious
reason why they should affect bank-level interest expenses other than through bank-level
internationalization. Indeed, our instruments do not significantly affect interest expenses when
included in baseline regressions, while the included foreign liability share variable continues to
be statistically significant as in the earlier results. We report the results of overidentifying
restrictions tests in the form of Hansen J-tests for our efficient GMM estimation. The results
indicate that the overidentifying restrictions tests are met in all regressions that show significant
results concerning bank internationalization at the second stage. They, however, reject the
validity of the instruments at 10% in the regressions 7, 9 and 11, which include the international
dummy or the (log of the) number of countries, without an interaction term with profit.
In the second-stage regression 1 and 3, the foreign liability share is estimated with
coefficients of 0.076 and 0.083 that are significant at the 5% and 1% levels, respectively. These
estimated coefficients are higher than the corresponding coefficients in Table 3, which suggests a
downward bias in our earlier estimation. In regression 5, the concentration variable enters with a
negative coefficient of -0.045 that is significant at 1%, and more negative than the corresponding
estimate in regression 1 of Table 4, which similarly is consistent with a less pronounced impact
of internationalization on interest expenses in the OLS estimation. Otherwise, estimated
coefficients associated with internationalization variables and their interactions with profits are
estimated to be statistically insignificant in Table 7. For the regressions that alternatively include
the international dummy and the (log of the) number of countries, Hausman endogeneity tests,
however, suggest that there is no need for IV estimation, while in regressions including the
foreign liabilities share and concentration variables (except regression 4) there is reason for IV
estimation. Overall, the IV estimation in Table 7 offers some evidence that bank
22
internationalization causes higher consolidated bank interest expenses, consistent with the
perception of a more fragile financial safety net for internationalized banks.
3.3. Robustness check: Measuring bank risk by asset volatility
So far we used bank profitability to proxy for the likelihood that a bank would have to
access the financial safety net. In this section, we in addition use a measure of a bank’s asset risk
to represent the chance that a bank will experience distress. In particular, the asset volatility
variable represents the bank’s share price volatility adjusted for bank leverage. Precisely, asset
volatility is calculated as the annualized standard deviation of weekly dividend-inclusive bank
stock returns, multiplied by the ratio of the market value of common equity to the imputed
market value of assets (calculated as the book value of assets plus the market value of common
equity and minus the book value of common equity). The asset volatility variable controls for
potentially different asset risk profiles of international banks resulting from international risk
diversification and international regulatory arbitrage.
We present three tables with interest expense regressions that include the asset volatility
variable and interactions of this variable with our internationalization measures. Specifically,
Table 8 presents regressions with country fixed effects (analogous to Tables 3 and 4), Table 9
presents regressions with bank fixed effects (analogous to Table 5), and Table 10 presents IV
regressions to deal with possible endogeneity (analogous to Table 7).
In Table 8, the asset volatility variable enters with positive coefficients that are
significant at 10% in all but 2 of the regressions. In regression 3 and 4, the foreign liabilities
share obtains coefficients that are positive and significant. In regression 5, concentration has a
significantly negative coefficient, indicating higher interest expenses for more internationalized,
23
less concentrated banks. The interaction terms with the internationalization variables are
estimated with insignificant coefficients throughout. The results of regressions with bank fixed
effects reported in Table 9 are similar. There is evidence that foreign liabilities share and
concentration affect bank interest expenses in ways that are consistent with effective market
discipline of internationalized banks, but interaction terms of asset volatility with
internationalization measures are estimated with insignificant coefficients. In regression 8, the
international dummy has a negative and marginally significant coefficient, unlike in the
corresponding regression in Table 8 and unlike regression 7 in Table 9 where we do not include
an interaction of asset volatility and the international dummy.
Table 10 presents IV regressions that include asset volatility and its interaction term with
the included internationalization variable. Instrumentation is very similar with our earlier IV
estimation in Table 7, and underidentification is not found to be a problem. As in Table 7,
regressions 7, 9 and 11 cannot pass the Hansen-J test of the overidentifying restrictions with
significance of 10%, but for these regressions the endogeneity tests (with as a null hypothesis no
need for IV estimation) are not rejected suggesting IV estimation is not necessary. As in the
earlier two tables, Table 10 does not provide any significant interaction terms. Nevertheless,
there is considerable evidence for a positive relationship between interest expense and the degree
of bank internationalization. The foreign liabilities share and concentration are significant in all
regressions in which they are included. Furthermore, the coefficients of these variables are very
close to the significant coefficients in Table 7 providing IV estimation without asset volatility. In
regressions 10 and 12, the number of countries and log of the number of countries have positive
coefficients significant at 10%, unlike in Table 7.
24
Overall, the positive relationship between interest expenses and internationalization is
robust to including asset volatility in the regressions, consistent with market discipline of
internationalized banks. The sensitivity of interest expenses to measures of internationalization,
however, does not appear to be affected by bank asset volatility.
3.4. Robustness check: Unconsolidated interest expense and deposit growth rates
So far we have examined whether bank internationalization affects a bank’s consolidated
interest expenses to test for market discipline on internationalized banks. In this section, we
consider whether internationalization in addition affects the interest expenses of the
unconsolidated parent bank, and also the rate of deposit growth of the consolidated bank.
There are two reasons to focus on unconsolidated parent-bank interest expenses rather
than consolidated interest expenses. First, the unconsolidated parent bank is mainly a
responsibility of the bank’s home-country financial safety net, more so than other parts of a
multinational bank. All the same, the unconsolidated parent bank is likely to be treated
differently from a stand-alone domestic bank, if the unconsolidated parent bank can only be
saved if the consolidated bank is saved as well. In particular, market discipline of
internationalized banks through higher unconsolidated-bank interest expenses suggests that
unconsolidated parents can be expected to receive relatively little from their domestic financial
safety nets. A further reason to focus on unconsolidated parent-bank interest expenses is that
they potentially are primarily in the currency denomination of the parent country, mitigating
concerns that interest expenses reflect differences in nominal interest rates across the countries
where the multinational bank operates. A disadvantage of focusing on unconsolidated interest
expenses, however, is that they to some extent can reflect interest rates on intra-bank loans that
25
may differ from market-determined interest rates, for instance so as to shift taxable profits
internationally within the multinational bank. Also, we reduce the sample size by about two
thirds by examining unconsolidated interest expenses.
Table 11 presents regressions with unconsolidated interest expenses as the dependent
variable including country fixed effects. In regression 4, we find that the consolidated-bank
foreign liabilities share and its interaction with the consolidated-bank profit variable receive
coefficients of 0.070 and -3.924 that are both significant at 1%. Both estimated coefficients are
larger in absolute value than the coefficients in the corresponding consolidated interest expense
regression 4 of Table 3. Thus, the sensitivity of unconsolidated interest expenses to overall
profitability increases relatively much with overall internationalization, consistent with market
discipline of especially the unconsolidated parent of a multinational bank. Similarly, in
regression 6 the sensitivity of unconsolidated interest expenses to overall profitability is found to
increase relatively much with the overall concentration variable (compared to consolidated
interest expenses as seen from regression 2 of Table 4 where the estimated coefficient on the
interaction of concentration and profit is smaller and insignificant).
In regression 7, we see that the international dummy receives a negative coefficient of -
0.008 that is significant at 5%, suggesting an internationalized bank faces lower interest
expenses. In regression 8, however, the international dummy receives a coefficient that is
insignificant, while the interaction of international with profit receives a negative coefficient that
is significant at 5%, consistent with market discipline of underperforming internationalized
banks. This suggests that the negative and significant coefficient on the international dummy in
regression 7 results from left out variable bias. Regressions 9-12 including the (log of the)
number of countries display similar patterns.
26
Table 12 is similar to Table 11 but it includes bank fixed effects. In regression 2, the
interaction of the foreign liabilities share and profit obtains a negative and significant coefficient,
unlike in regression 2 of Table 11. Conversely, the concentration variable receives an
insignificant coefficient in regression 6 of Table 12. Furthermore, the international dummy and
the (log of the) number of countries obtain insignificant coefficients in regressions 7, 9, and 11 of
Table 12.
To conclude this section, we examine whether deposit growth rates provide evidence of
market discipline on internationalized banks. In particular, internationalized banks may
experience lower deposit growth rates, especially if they are performing badly, as evidence of
market discipline. Table 13 provides regressions of consolidated-bank deposit growth rates
including country fixed effects that are similar to the earlier sets of interest expense regressions.
In regression 8, the international dummy obtains a negative coefficient of -0.025 that is
significant at 10%, consistent with market discipline on internationalized banks. Otherwise, none
of the internationalization variables or interactions of these variables with profit obtains a
significant coefficient. Thus, in Table 13 we find little scant evidence of market discipline of
internationalized banks through deposit growth rates.
Finally, Table 14 reports results analogous to Table 13 including bank fixed effects. The
foreign liabilities share is seen to obtain negative and significant coefficients in regression 1, 2
and 4 in line with the market discipline hypothesis. Similarly, the concentration variable obtains
positive and significant coefficients in regressions 5 and 6, consistent with the market discipline
hypothesis. Furthermore, in regression 8 a positive and significant interaction term of
international dummy and profit suggests higher sensitivity of deposit growth rates to the bank
performance for internationalized banks - which is also confirmed by regression 12 including the
27
log number of countries. In addition, regressions 10 and 12 provide evidence for an immediate
negative impact of number of countries on deposit growth rates. Overall, Table 14 suggests that
there is some effective market discipline through deposit growth rates of internationalized banks.
4. Conclusion
This paper provides evidence that internationalized banks face higher interest expenses.
In particular, consolidated banks with a higher share of foreign liabilities and a lower
international concentration of their liabilities pay higher interest expenses. Our benchmark
estimation suggests that an international bank’s cost of funds raised through a foreign subsidiary
is between 1.5% and 2.4% higher than the cost of funds for a purely domestic bank, which is a
sizeable difference given an overall mean cost of funds of 3.3% in our sample. Our finding that
internationalized banks face higher interest expenses is robust to IV estimation where we use
indices of country-level economic integration to instrument for bank-level internationalization.
We find evidence that bank internationalization is associated with higher interest expenses of the
unconsolidated parent bank as well, and with lower deposit growth rates of the consolidated
bank.
These results suggest that the bank liability holders of internationalized banks expect to
suffer relatively high losses on their holdings. Bank liability holders only suffer losses following
bank distress if they are not made whole by the financial safety net. Hence, bank liability holders
of internationalized banks appear to rely relatively little on the financial safety net. This could
reflect that national financial safety net managers are less likely to contribute to the bailout of a
cross-border bank, or that the recovery and resolution process as applied to a cross-border bank
is expected to be relatively inefficient.
28
A less reliable financial safety net for international banks puts international banks at a
competitive disadvantage, and is a barrier to international banking market integration. Any lower
implicit subsidies through national financial safety nets, in particular, imply a higher cost of
funds for internationally active banks. To remedy the potentially discriminatory nature of the
financial safety net against international banks, institutional reform can be envisaged.
Specifically, decisions regarding the bailouts of international banks can be taken away from
national authorities and, instead, be entrusted to international bodies. The EU, for instance, could
create a European Resolution Authority to make formal decisions on international European
bank bailouts.13 Such a resolution authority would be in a position to internalize all the
international externalities of a cross-border bank bailout, and presumably it would have powers
to assign the overall fiscal burden to the countries involved.
The advantage of such an approach is that it could bring about recapitalizations of
international banks that are collectively optimal at the time of an international banking crisis. A
disadvantage of improved access to the financial safety net for international banks, however, is
that it may increase moral hazard contributing to excessive risk taking. On balance, it is not clear
whether it is desirable to improve the bailout prospects of international banks.
13
In the EU context, international agreements regarding bank regulation and resolution so far inadequately address
potential international conflicts of interest regarding distressed banks. The directive on the winding-up of credit
institutions (European Commission, 2001) determines that the parent country’s legal system applies in case of a
bank dissolution and that all bank creditors have to be treated equally in case of an internationally branched bank,
while not addressing the parent country’s disincentive to provide bail out funding. The EU directive on financial
conglomerates (European Commission, 2001) requires each cross-border bank to have a principle supervisor which
is intended to play a leading role in case of an international bank restructuring or winding-up. This potentially
improves the availability of information at the time of bank distress, but it does not eliminate the basic conflict of
interest among the involved states regarding fiscal burden sharing. The creation of the European Banking Authority
in 2011 may similarly strengthen the supervision of large cross-border banks in the EU, without affecting the
outcome of international bank resolutions. The EU has set out to improve its framework for bank recovery and
resolution, but these efforts are currently only at the consultative stage (see European Commission, 2011).
29
Less ambiguously, the international economy can benefit from enlarging the recovery and
resolution options available to authorities dealing with weakened international banks (as
envisaged by the European Commission, 2011). In the end, quick intervention strategies and
least-cost resolution methods should be made applicable to all banks, regardless of their degree
of internationalization. This would reduce moral hazard and the likelihood of a costly bailout for
domestic and cross-border banks alike, thereby creating a level playing field for all banks.
30
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Appendix. Variable definitions and data sources
Variable Description Sources
Foreign liabilities share Sum of the liabilities of foreign subsidiary banks weighted by the parent bank’s ownership share divided by Bankscope
the parent bank’s consolidated liabilities
Concentration Sum of the squared shares of the liabilities weighted by the parent bank’s ownership ship relative to the Bankscope
parent’s bank consolidated liabilities for all countries where the parent bank operates
International Dummy variable that equals 1 if a bank has a least 50% ownership of a foreign bank Bankscope
Countries Number of countries where a bank has a majority stake in a bank, including the parent country Bankscope
Log of countries Natural logarithm of the number of countries where a bank has a majority state in a bank, including the parent Bankscope
country
Interest expense Interest expense over bank liabilities excluding non-interest bearing debt Bankscope
Interest expense, Interest expense over bank liabilities excluding non-interest bearing debt in the unconsolidated statement of Bankscope
unconsolidated the parent bank
Deposit growth Growth rate of a bank's customer and short term funding after dividing by the GDP deflator in percent Bankscope and WDI
Lagged profit Pre-tax profits divided by assets, lagged one period Bankscope
Lagged asset volatility Bank asset volatility calculated as where stddev(E) is the annualized standard deviation of Bankscope and
weekly dividend-inclusive bank stock returns, E is the market value of common equity and V is the book Datastream
value of assets plus the market value of common equity minus the book value of common equity, lagged one
period
Assets Log of assets in millions of 2000 US dollars Bankscope and WDI
Liabilities over GDP Bank liabilities divided by GDP of the home country
Overhead Ratio of personnel and other non-interest expenses to assets Bankscope
Short term debt Bank's customer and short term funding divided by total interest-bearing debt Bankscope
Inflation Rate of change in consumer prices WDI
GDP growth Rate of real per capita GDP growth WDI
GDP per capita GDP per capita in thousands of constant 2000 U.S. dollars WDI
Tourism Sum of number of tourist arrivals and departures over population of the country WDI
FDI Sum of inward and outward flows of foreign direct investments over GDP WDI
Openness Sum of exports and imports over GDP WDI
Portfolio position Sum of assets and liabilities with respect to a country’s portfolio investment position over GDP IMF IFS
Inflation difference The difference between foreign inflation and parent-country inflation where foreign inflation is the sum of Bankscope and WDI
foreign-country inflation rates weighted by the foreign countries’ shares in total foreign liabilities of a parent
bank
34
Table 1. Summary statistics on internationalization and other variables
Foreign liabilities share is the sum of the liabilities of foreign subsidiary banks weighted by the parent bank’s ownership share divided by the parent bank’s consolidated liabilities.
Concentration is the sum of the squared shares of the liabilities weighted by the parent bank’s ownership ship relative to the parent’s bank consolidated liabilities for all countries
where the parent bank operates. International is a dummy variable that equals 1 if a bank has a least 50% ownership of a foreign bank. Countries is the number of countries where
a bank operates including the parent country. Log of countries is the natural logarithm of the number of countries where a bank operates including the parent country. Interest
expense is interest expense over bank liabilities excluding non-interest bearing debt. Interest expense, unconsolidated is interest expense over bank liabilities excluding non-interest
bearing debt in the unconsolidated statement of the parent bank. Deposit growth is the growth rate of a bank's customer and short term funding after dividing by the GDP deflator
in percent. Lagged profit is pre-tax profits divided by total assets, lagged one period. Lagged asset volatility is calculated as where stddev(E) is annualized
standard deviation of weekly dividend-inclusive bank stock returns, E is market value of common equity and V is book value of assets plus market value of common equity minus
book value of common equity, lagged one period. Assets is the natural logarithm of total assets in constant 2000 US dollars. Liabilities over GDP is total bank liabilities divided by
GDP. Overhead is personnel expenses and other non-interest expenses over total assets. Short term debt is customer and short term funding to total interest paying debt. Inflation
is the rate of change in consumer prices. GDP growth is the rate of real per capita GDP growth. GDP per capita is GDP per capita in thousands of constant 2000 dollars. Inflation
difference is the difference between foreign inflation and parent-country inflation where foreign inflation is the sum of foreign-country inflation rates weighted by the foreign
countries’ shares in total foreign liabilities of a parent bank. Data for this variable in this table only reflect observations with a positive foreign liabilities share. Tourism is total
number of touristic arrivals and departures over total population. FDI is the sum of inward and outward flows of foreign direct investments over GDP. Openness is the sum of
exports and imports of goods and services over GDP. Portfolio position is the sum of assets and liabilities regarding a country’s portfolio investment position over GDP.
Variables Obs Mean Std. Dev. Min Max
Foreign liabilities share 3684 0.019 0.065 0 1.640
Concentration 3682 0.967 0.086 0.271 1
International 3684 0.270 0.444 0 1
Countries 3684 1.540 1.312 1 22
Log of countries 3684 0.267 0.491 0 3.091
Interest expense 3684 0.033 0.024 0.000 0.289
Interest expense, unconsolidated 1366 0.039 0.044 0.000 0.731
Deposit growth 3671 0.089 0.243 -3.527 3.372
Lagged profit 3684 0.013 0.025 -0.437 0.293
Lagged asset volatility 3124 0.040 0.049 0.000 0.664
Assets 3684 22.900 2.197 17.540 28.788
Liabilities over GDP 3684 0.098 0.220 0.000 1.983
Overhead 3684 0.028 0.019 0.002 0.200
Short term debt 3684 0.815 0.170 0 0.995
Inflation 3684 0.037 0.056 -0.040 0.961
GDP growth 3684 0.021 0.030 -0.210 0.433
GDP per capita 3684 24.994 14.606 0.154 63.475
Inflation difference 1274 -0.008 0.083 -0.961 0.451
Tourism 3075 0.789 1.378 0.008 14.221
FDI 3075 0.054 0.070 0.001 1.009
Openness 3075 0.539 0.538 0.190 4.381
Portfolio position 3075 0.994 0.705 0.000 15.126
35
Table 2. Correlations for interest expense, deposit growth and internationalization variables
Interest expense is interest expense over bank liabilities excluding non-interest bearing debt. Interest expense, unconsolidated is interest expense over bank
liabilities excluding non-interest bearing debt in the unconsolidated statement of the parent bank. Deposit growth is the growth rate of a bank's customer and
short term funding after dividing by the GDP deflator in percent. Foreign liabilities share is the sum of the liabilities of foreign subsidiary banks weighted by the
parent bank’s ownership share divided by the parent bank’s consolidated liabilities. Concentration is the sum of the squared shares of the liabilities weighted by
the parent bank’s ownership ship relative to the parent’s bank consolidated liabilities for all countries where the parent bank operates. International is a dummy
variable that equals 1 if a bank has a least 50% ownership of a foreign bank. Countries is the number of countries where a bank operates including the parent
country. Log of countries is the natural logarithm of the number of countries where a bank operates including the parent country. *** denotes significance at 1%.
Interest Foreign
Interest Log of
expense, Deposit growth liabilities Concentration International Countries
expense countries
uncons. share
Interest expense 1
Interest expense, unconsolidated 0.558*** 1
Deposit growth -0.092*** 0.024 1
Foreign liabilities share 0.134*** 0.016 -0.008 1
Concentration -0.157*** -0.014 0.004 -0.965*** 1
International 0.171*** -0.018 -0.025 0.399*** -0.534*** 1
Countries 0.098*** -0.032 -0.017 0.357*** -0.478*** 0.677*** 1
Log of countries 0.144*** -0.032 -0.020 0.412*** -0.550*** 0.894*** 0.914*** 1
36
Table 3. A bank’s foreign liabilities and bank interest expense
The dependent variable is Interest expense, which is interest expense over bank liabilities excluding non-interest bearing debt. Assets is the natural logarithm of total assets in
constant 2000 US dollars. Liabilities over GDP is total bank liabilities divided by GDP. Overhead is personnel expenses and other non-interest expenses over total assets. Short
term debt is ratio of customer and short term funding to total interest paying debt. Inflation is rate of change in consumer prices. GDP growth is rate of real per capita GDP growth.
GDP per capita is GDP per capita in thousands of constant 2000 dollars. Foreign liabilities share is the sum of the liabilities of foreign subsidiary banks weighted by the parent
bank’s ownership share divided by the parent bank’s consolidated liabilities. Lagged profit is pre-tax profits divided by total assets, lagged one period. Inflation difference is the
difference between foreign inflation and parent-country inflation where foreign inflation is the sum of foreign-country inflation rates weighted by the foreign countries’ shares in
total foreign liabilities of a parent bank. In regressions 3 and 4 we require Foreign liabilities share to be less than 0.3. We estimate all regressions using country and year fixed
effects. The standard errors clustered at bank level are given in parentheses. *, ** and *** denote significance at 10%, 5% and 1%.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
Assets -0.001*** -0.001*** -0.001*** -0.001*** -0.001*** -0.001*** -0.001*** -0.001*** -0.001*** -0.001***
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Liabilities over GDP -0.004 -0.004 -0.005* -0.005* -0.004 -0.005* -0.005* -0.005* -0.005* -0.006**
(0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003)
Overhead 0.070 0.068 0.068 0.066 0.070 0.068 0.045 0.045 0.046 0.044
(0.045) (0.045) (0.044) (0.043) (0.045) (0.044) (0.045) (0.045) (0.045) (0.044)
Short term debt -0.023*** -0.022*** -0.023*** -0.022*** -0.023*** -0.022*** -0.023*** -0.023*** -0.023*** -0.023***
(0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005)
Inflation 0.097*** 0.097*** 0.098*** 0.097*** 0.097*** 0.096*** 0.134*** 0.133*** 0.133*** 0.136***
(0.025) (0.025) (0.025) (0.025) (0.025) (0.025) (0.021) (0.021) (0.021) (0.021)
GDP growth -0.032 -0.032 -0.035* -0.035* -0.031 -0.031 -0.038* -0.038* -0.038* -0.037*
(0.020) (0.020) (0.020) (0.020) (0.020) (0.020) (0.019) (0.019) (0.020) (0.019)
GDP per capita 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Foreign liabilities share 0.012 0.027 0.020* 0.040*** 0.021* 0.048** 0.015** 0.019 0.024** 0.063***
(0.008) (0.017) (0.011) (0.014) (0.012) (0.022) (0.008) (0.014) (0.011) (0.019)
Lagged profit -0.061* -0.051 -0.060* -0.047 -0.060* -0.047 -0.059* -0.056* -0.058* -0.048
(0.033) (0.035) (0.033) (0.035) (0.033) (0.035) (0.032) (0.034) (0.032) (0.034)
Lagged profit*Foreign liabilities
-1.042 -1.491*** -1.845** -0.292 -2.278***
share
(1.045) (0.522) (0.906) (0.988) (0.804)
Foreign liabilities share squared -0.013 -0.078 -0.014 -0.180**
(0.009) (0.131) (0.009) (0.084)
Lagged profit*Foreign liabilities
4.395 11.134**
share squared
(8.455) (5.439)
Inflation difference*Lagged
0.440*** 0.434*** 0.439*** 0.489***
foreign liabilities share
(0.084) (0.084) (0.084) (0.088)
N 3684 3684 3651 3651 3684 3684 3676 3676 3676 3676
R-sq 0.670 0.671 0.670 0.672 0.670 0.672 0.669 0.669 0.669 0.672
37
Table 4. Alternative internationalization measures and bank interest expense
The dependent variable is Interest expense, which is interest expense over bank liabilities excluding non-interest
bearing debt. Assets is the natural logarithm of total assets in constant 2000 US dollars. Liabilities over GDP is total
bank liabilities divided by GDP. Overhead is personnel expenses and other non-interest expenses over total assets.
Short term debt is ratio of customer and short term funding to total interest paying debt. Inflation is rate of change in
consumer prices. GDP growth is rate of real per capita GDP growth. GDP per capita is GDP per capita in thousands
of constant 2000 dollars. Lagged profit is pre-tax profits divided by total assets, lagged one period. Concentration is
the sum of the squared shares of the liabilities weighted by the parent bank’s ownership ship relative to the parent’s
bank consolidated liabilities for all countries where the parent bank operates. International is a dummy variable that
equals 1 if a bank has a least 50% ownership of a foreign bank. Countries is the number of countries where a bank
operates including the parent country. Log of countries is the natural logarithm of the number of countries where a
bank operates including the parent country. We estimate all regressions using country and year fixed effects. The
standard errors clustered at bank level are given in parentheses. *, ** and *** denote significance at 10%, 5% and
1%.
(1) (2) (3) (4) (5) (6) (7) (8)
Assets -0.001*** -0.001*** -0.001*** -0.001*** -0.001*** -0.001*** -0.001*** -0.001***
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Liabilities over GDP -0.004 -0.004* -0.004 -0.004 -0.003 -0.003 -0.003 -0.004
(0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003)
Overhead 0.070 0.068 0.070 0.066 0.070 0.068 0.070 0.066
(0.045) (0.045) (0.046) (0.046) (0.046) (0.046) (0.046) (0.046)
Short term debt -0.023*** -0.022*** -0.023*** -0.022*** -0.023*** -0.022*** -0.023*** -0.022***
(0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005)
Inflation 0.097*** 0.096*** 0.098*** 0.097*** 0.098*** 0.098*** 0.098*** 0.098***
(0.025) (0.025) (0.025) (0.025) (0.025) (0.025) (0.025) (0.025)
GDP growth -0.031 -0.031 -0.032 -0.032 -0.033 -0.032 -0.033 -0.032
(0.020) (0.020) (0.020) (0.020) (0.020) (0.020) (0.020) (0.020)
GDP per capita 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Lagged profit -0.061* -0.678 -0.061* -0.046 -0.062* 0.017 -0.062* -0.048
(0.033) (0.443) (0.033) (0.035) (0.033) (0.061) (0.033) (0.035)
Concentration -0.009 -0.018**
(0.006) (0.008)
Lagged profit*Concentration 0.630
(0.457)
International 0.000 0.002
(0.001) (0.001)
Lagged profit*International -0.144***
(0.046)
Countries -0.000 0.000
(0.000) (0.001)
Lagged profit*Countries -0.071*
(0.040)
Log of countries -0.001 0.001
(0.001) (0.001)
Lagged profit*Log of countries -0.169***
(0.065)
N 3682 3682 3684 3684 3684 3684 3684 3684
R-sq 0.670 0.671 0.669 0.671 0.670 0.671 0.670 0.671
38
Table 5. A bank’s internationalization and bank interest expense with bank fixed effects
The dependent variable is Interest expense, which is interest expense over bank liabilities excluding non-interest bearing debt. Assets is the natural logarithm of
total assets in constant 2000 US dollars. Liabilities over GDP is total bank liabilities divided by GDP. Overhead is personnel expenses and other non-interest
expenses over total assets. Short term debt is ratio of customer and short term funding to total interest paying debt. Inflation is rate of change in consumer prices.
GDP growth is rate of real per capita GDP growth. GDP per capita is GDP per capita in thousands of constant 2000 dollars. Lagged profit is pre-tax profits
divided by total assets, lagged one period. Foreign liabilities share is the sum of the liabilities of foreign subsidiary banks weighted by the parent bank’s
ownership share divided by the parent bank’s consolidated liabilities. Concentration is the sum of the squared shares of the liabilities weighted by the parent
bank’s ownership ship relative to the parent’s bank consolidated liabilities for all countries where the parent bank operates. International is a dummy variable
that equals 1 if a bank has a least 50% ownership of a foreign bank. Countries is the number of countries where a bank operates including the parent country. Log
of countries is the natural logarithm of the number of countries where a bank operates including the parent country. In regressions 3 and 4 we require Foreign
liabilities share to be less than 0.3. We estimate all regressions using bank and year fixed effects. Robust standard errors are given in parentheses. *, ** and ***
denote significance at 10%, 5% and 1%.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
Assets 0.002 0.002 0.001 0.001 0.002 0.002 0.002 0.002 0.002 0.002 0.002 0.002
(0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002)
Liabilities over GDP -0.006 -0.007 -0.006 -0.006 -0.006 -0.006 -0.005 -0.005 -0.005 -0.005 -0.005 -0.005
(0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005)
Overhead 0.268*** 0.270*** 0.242*** 0.245*** 0.270*** 0.271*** 0.272*** 0.273*** 0.273*** 0.274*** 0.274*** 0.274***
(0.094) (0.093) (0.083) (0.084) (0.095) (0.094) (0.096) (0.096) (0.096) (0.096) (0.096) (0.096)
Short term debt -0.002 -0.001 -0.002 -0.001 -0.003 -0.001 -0.002 -0.001 -0.003 -0.001 -0.003 -0.001
(0.011) (0.010) (0.011) (0.010) (0.011) (0.011) (0.011) (0.011) (0.011) (0.011) (0.011) (0.011)
Inflation 0.080*** 0.078*** 0.081*** 0.080*** 0.080*** 0.079*** 0.080*** 0.079*** 0.080*** 0.080*** 0.080*** 0.080***
(0.021) (0.021) (0.021) (0.021) (0.021) (0.021) (0.020) (0.020) (0.020) (0.020) (0.020) (0.020)
GDP growth -0.050** -0.050** -0.055** -0.055** -0.050** -0.049** -0.050** -0.050** -0.050** -0.049** -0.050** -0.049**
(0.023) (0.022) (0.022) (0.022) (0.023) (0.022) (0.022) (0.022) (0.022) (0.022) (0.022) (0.022)
GDP per capita 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Lagged profit -0.076* -0.056 -0.073* -0.061 -0.076* -0.975* -0.076* -0.059 -0.077* 0.028 -0.077** -0.058
(0.039) (0.043) (0.039) (0.043) (0.039) (0.540) (0.039) (0.043) (0.039) (0.070) (0.039) (0.042)
Foreign liabilities share 0.022** 0.048* 0.021* 0.037**
(0.010) (0.025) (0.011) (0.017)
Lagged profit*Foreign liabilities share -1.895 -1.173**
(1.170) (0.567)
Concentration -0.008* -0.022**
(0.004) (0.010)
Lagged profit*Concentration 0.919*
(0.557)
International -0.002 -0.000
(0.001) (0.002)
Lagged profit*International -0.120**
39
(0.049)
Countries -0.000 0.000
(0.000) (0.000)
Lagged profit*Countries -0.090**
(0.042)
Log of countries -0.002* 0.000
(0.001) (0.001)
Lagged profit*Log of countries -0.172**
(0.072)
N 3684 3684 3651 3651 3682 3682 3684 3684 3684 3684 3684 3684
R-sq 0.355 0.362 0.363 0.366 0.353 0.359 0.353 0.356 0.352 0.357 0.353 0.358
40
Table 6. A bank’s lagged internationalization and bank interest expense
The dependent variable is Interest expense, which is interest expense over bank liabilities excluding non-interest bearing debt. Assets is the natural logarithm of
total assets in constant 2000 US dollars. Liabilities over GDP is total bank liabilities divided by GDP. Overhead is personnel expenses and other non-interest
expenses over total assets. Short term debt is ratio of customer and short term funding to total interest paying debt. Inflation is rate of change in consumer prices.
GDP growth is rate of real per capita GDP growth. GDP per capita is GDP per capita in thousands of constant 2000 dollars. Lagged profit is pre-tax profits
divided by total assets, lagged one period. Lagged foreign liabilities share is the sum of the liabilities of foreign subsidiary banks weighted by the parent bank’s
ownership share divided by the parent bank’s consolidated liabilities, lagged one period. Lagged concentration is the sum of the squared shares of the liabilities
weighted by the parent bank’s ownership ship relative to the parent’s bank consolidated liabilities for all countries where the parent bank operates, lagged one
period. Lagged international is a dummy variable that equals 1 if a bank has a least 50% ownership of a foreign bank, lagged one period. Lagged countries is the
number of countries where a bank operates including the parent country, lagged one period. Lagged log of countries is the natural logarithm of the number of
countries where a bank operates including the parent country, lagged one period. In regressions 3 and 4 we require the Lagged foreign liabilities share to be less
than 0.3. We estimate all regressions using country and year fixed effects. The standard errors clustered at bank level are given in parentheses. *, ** and ***
denote significance at 10%, 5% and 1%.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
Assets -0.001** -0.001** -0.001** -0.001** -0.001** -0.001** -0.001** -0.001** -0.001** -0.001** -0.001** -0.001**
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Liabilities over GDP -0.006** -0.007** -0.007** -0.007** -0.006** -0.006** -0.005* -0.006** -0.005* -0.005* -0.005* -0.005*
(0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003)
Overhead 0.100* 0.097* 0.084 0.083 0.098* 0.096* 0.101* 0.097* 0.102* 0.101* 0.101* 0.098*
(0.056) (0.055) (0.053) (0.053) (0.056) (0.055) (0.057) (0.057) (0.057) (0.056) (0.057) (0.056)
Short term debt -0.025*** -0.025*** -0.025*** -0.025*** -0.025*** -0.025*** -0.025*** -0.024*** -0.025*** -0.025*** -0.025*** -0.025***
(0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005)
Inflation 0.090*** 0.089*** 0.091*** 0.091*** 0.090*** 0.090*** 0.091*** 0.091*** 0.091*** 0.091*** 0.091*** 0.091***
(0.030) (0.030) (0.030) (0.030) (0.030) (0.030) (0.029) (0.029) (0.029) (0.029) (0.029) (0.029)
GDP growth -0.026 -0.026 -0.037* -0.037* -0.030 -0.030 -0.027 -0.025 -0.027 -0.027 -0.027 -0.027
(0.023) (0.023) (0.022) (0.022) (0.022) (0.022) (0.024) (0.024) (0.024) (0.024) (0.024) (0.024)
GDP per capita -0.000 -0.000 -0.000 -0.000 -0.000 -0.000 -0.000 -0.000 -0.000 -0.000 -0.000 -0.000
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Lagged profit -0.027 -0.018 -0.018 -0.016 -0.026 -0.861 -0.029 -0.016 -0.030 -0.009 -0.030 -0.023
(0.042) (0.042) (0.041) (0.042) (0.042) (0.541) (0.042) (0.042) (0.043) (0.066) (0.042) (0.043)
Lagged Foreign liabilities share 0.032 0.055 0.025** 0.031*
(0.026) (0.034) (0.012) (0.016)
Lagged profit*Lagged Foreign liabilities
-1.982** -0.408
share
(0.983) (0.964)
Lagged Concentration -0.009 -0.021*
(0.007) (0.012)
Lagged profit*Lagged Concentration 0.845
(0.547)
Lagged International 0.000 0.003
41
(0.001) (0.002)
Lagged profit*Lagged International -0.186**
(0.073)
Lagged Countries -0.000 -0.000
(0.000) (0.001)
Lagged profit*Lagged Countries -0.020
(0.043)
Lagged Log of countries -0.001 0.001
(0.001) (0.002)
Lagged profit*Lagged Log of countries -0.142
(0.095)
N 2340 2340 2320 2320 2339 2339 2340 2340 2340 2340 2340 2340
R-sq 0.702 0.704 0.696 0.696 0.693 0.694 0.697 0.699 0.698 0.698 0.697 0.698
42
Table 7. Instrumental variable regressions for internationalization measures and bank interest expense
The dependent variable is Interest expense, which is interest expense over bank liabilities excluding non-interest bearing debt. Assets is the natural logarithm of
total assets in constant 2000 US dollars. Liabilities over GDP is total bank liabilities divided by GDP. Overhead is personnel expenses and other non-interest
expenses over total assets. Short term debt is ratio of customer and short term funding to total interest paying debt. Inflation is rate of change in consumer prices.
GDP growth is rate of real per capita GDP growth. GDP per capita is GDP per capita in thousands of constant 2000 dollars. Lagged profit is pre-tax profits
divided by total assets, lagged one period. Foreign liabilities share is the sum of the liabilities of foreign subsidiary banks weighted by the parent bank’s
ownership share divided by the parent bank’s consolidated liabilities. Concentration is the sum of the squared shares of the liabilities weighted by the parent
bank’s ownership ship relative to the parent’s bank consolidated liabilities for all countries where the parent bank operates. International is a dummy variable
that equals 1 if a bank has a least 50% ownership of a foreign bank. Countries is the number of countries where a bank operates including the parent country. Log
of countries is the natural logarithm of the number of countries where a bank operates including the parent country. We estimate all regressions using two-step
GMM with country and year fixed effects. Country fixed effects and the constant are partialled out, without changing the results. The following instruments are
used: Tourism which is the total number of tourist arrivals and departures over total population; FDI which is the sum of inward and outward flows of foreign
direct investments over GDP; Openness which is the sum of exports and imports of goods and services over GDP; Portfolio position which is the sum of assets
and liabilities with respect to a country’s portfolio investment position over GDP. We also report the coefficient estimates for the instrumental variables in the
first stage regression for Foreign liabilities share, the p-value of the F-test of joint significance of instruments in this first stage regression, the p-value of the
Hansen J-test of overidentifying restrictions, the Hausman specification error test of the difference between IV and OLS estimations as an endogeneity test, and
the p-value of an LM test regarding the correlation of exogenous instruments with endogenous instruments as a test of underidentification. In regressions 3 and 4
we require the instrumented Foreign liabilities share to be less than 0.3. The standard errors clustered at the bank level are given in parentheses. *, ** and ***
denote significance at 10%, 5% and 1%.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
Assets -0.001*** -0.001*** -0.001*** -0.001*** -0.001*** -0.001*** -0.001** -0.001** -0.001** -0.001** -0.001** -0.001**
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Liabilities over GDP -0.009** -0.008** -0.010*** -0.009*** -0.009*** -0.009*** -0.009** -0.006 -0.014 -0.008 -0.012** -0.007
(0.004) (0.003) (0.003) (0.003) (0.003) (0.003) (0.004) (0.004) (0.009) (0.008) (0.006) (0.005)
Overhead 0.046 0.048 0.045 0.050 0.047 0.050 0.050 0.047 0.039 0.052 0.046 0.050
(0.046) (0.044) (0.046) (0.044) (0.046) (0.044) (0.047) (0.045) (0.048) (0.045) (0.046) (0.044)
Short term debt -0.019*** -0.020*** -0.019*** -0.019*** -0.019*** -0.019*** -0.021*** -0.023*** -0.021*** -0.023*** -0.021*** -0.023***
(0.004) (0.004) (0.004) (0.004) (0.004) (0.004) (0.004) (0.004) (0.004) (0.004) (0.004) (0.004)
Inflation 0.134*** 0.135*** 0.132*** 0.132*** 0.132*** 0.131*** 0.143*** 0.134*** 0.144*** 0.137*** 0.144*** 0.134***
(0.022) (0.023) (0.023) (0.023) (0.022) (0.023) (0.022) (0.024) (0.022) (0.023) (0.021) (0.024)
GDP growth -0.140*** -0.140*** -0.145*** -0.145*** -0.138*** -0.138*** -0.145*** -0.142*** -0.156*** -0.152*** -0.151*** -0.147***
(0.029) (0.027) (0.029) (0.028) (0.029) (0.028) (0.028) (0.028) (0.028) (0.027) (0.028) (0.027)
GDP per capita 0.000 0.000 0.000** 0.000** 0.000 0.000 0.000** 0.001** 0.001** 0.001* 0.001** 0.001**
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Lagged profit -0.062** -0.077*** -0.059** -0.078*** -0.062** 1.108 -0.053** -0.066*** -0.051* -0.420 -0.052** -0.070***
(0.025) (0.021) (0.025) (0.021) (0.025) (0.849) (0.025) (0.021) (0.026) (0.265) (0.025) (0.021)
Foreign liabilities share 0.076** 0.027 0.083*** 0.035
(0.031) (0.041) (0.030) (0.044)
Lagged profit*Foreign liabilities
3.209 3.055
share
43
(2.223) (2.394)
Concentration -0.045*** -0.026
(0.016) (0.020)
Lagged profit*Concentration -1.186
(0.853)
International 0.006 -0.005
(0.007) (0.008)
Lagged profit*International 0.631
(0.419)
Countries 0.003 -0.002
(0.003) (0.005)
Lagged profit*Countries 0.349
(0.257)
Log of countries 0.007 -0.005
(0.007) (0.009)
Lagged profit*Log of countries 0.747
(0.511)
First Stage Regressions:
Tourism 0.0149 0.016 0.025** 0.026** -0.045** -0.047** -0.043 0.036 -0.227 -0.130 -0.053 0.004
(0.016) (0.018) (0.011) (0.012) (0.019) (0.022) (0.073) (0.072) (0.169) (0.171) (0.066) (0.067
FDI 0.083*** 0.073** 0.065*** 0.051*** -0.121*** -0.101** 0.585*** 0.534*** 1.413*** 0.945 0.645*** 0.529**
(0.025) (0.031) (0.019) (0.019) (0.038) (0.041) (0.157) (0.172) (0.546) (0.608) (0.169) (0.216)
Openness 0.021 0.023 0.004 0.005 -0.0129 -0.015 0.254 0.237 0.041 -0.021 0.166 0.144
(0.028) (0.029) (0.025) (0.025) (0.047) (0.048) (0.163) (0.163) (0.606) (0.609) (0.191) (0.191)
Portfolio position 0.013 0.014 0.009 0.010* -0.014 -0.015 -0.026 -0.049 0.333 0.320 0.33 0.018
(0.008) (0.009) (0.006) (0.006) (0.010) (0.011) (0.046) (0.050) (0.253) (0.267) (0.058) (0.063)
Lagged profit*Tourism -0.014 -0.015 0.042 -3.294** -4.878* -2.595**
(0.243) (0.199) (0.377) (1.442) (2.909) (1.285)
Lagged profit*FDI 0.787 1.049 -1.588 3.097 32.306 7.671
(1.014) (0.946) (1.856) (9.356) (27.385) (7.727)
Lagged profit*Openness -0.218 -0.125 0.221 0.839 3.981 1.340
(0.204) (0.152) (0.307) (2.317) (4.229) (1.951)
Lagged profit*Portfolio position -0.043 -0.026 0.069 1.885* 1.586 1.3127
(0.156) (0.126) (0.239) (1.055) (2.024) (0.928)
N 3075 3075 3052 3052 3073 3073 3075 3075 3075 3075 3075 3075
R-sq 0.235 0.234 0.284 0.277 0.268 0.264 0.289 0.246 0.236 0.240 0.273 0.232
Excluded instruments F-test 0.000 0.000 0.000 0.000 0.000 0.000 0.003 0.000 0.014 0.010 0.001 0.000
Hansen J-test (p-value) 0.622 0.922 0.694 0.952 0.690 0.960 0.091 0.500 0.091 0.321 0.083 0.433
Endogeneity test (p-value) 0.042 0.060 0.057 0.102 0.040 0.055 0.535 0.640 0.334 0.674 0.374 0.538
Underidentification test (p-value) 0.007 0.027 0.011 0.029 0.011 0.042 0.001 0.002 0.059 0.014 0.021 0.015
44
Table 8. A bank’s internationalization and market bank interest expense controlling for asset volatility
The dependent variable is Interest expense, which is interest expense over bank liabilities excluding non-interest bearing debt. Assets is the natural logarithm of
total assets in constant 2000 US dollars. Liabilities over GDP is total bank liabilities divided by GDP. Overhead is personnel expenses and other non-interest
expenses over total assets. Short term debt is ratio of customer and short term funding to total interest paying debt. Inflation is rate of change in consumer prices.
GDP growth is rate of real per capita GDP growth. GDP per capita is GDP per capita in thousands of constant 2000 dollars. Lagged profit is pre-tax profits
divided by total assets, lagged one period. Lagged asset volatility is calculated as where stddev(E) is annualized standard deviation of weekly
dividend-inclusive bank stock returns, E is market value of common equity and V is book value of assets minus the book value of common equity plus market
value of common equity, lagged one period. Foreign liabilities share is the sum of the liabilities of foreign subsidiary banks weighted by the parent bank’s
ownership share divided by the parent bank’s consolidated liabilities. Concentration is the sum of the squared shares of the liabilities weighted by the parent
bank’s ownership ship relative to the parent’s bank consolidated liabilities for all countries where the parent bank operates. International is a dummy variable
that equals 1 if a bank has a least 50% ownership of a foreign bank. Countries is the number of countries where a bank operates including the parent country. Log
of countries is the natural logarithm of the number of countries where a bank operates including the parent country. In regressions 3 and 4 we require the Foreign
liabilities share to be less than 0.3. We estimate all regressions using country and year fixed effects. The standard errors clustered at bank level are given in
parentheses. *, ** and *** denote significance at 10%, 5% and 1%.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
Assets -0.001*** -0.001*** -0.001*** -0.001*** -0.001*** -0.001*** -0.001*** -0.001*** -0.001*** -0.001*** -0.001*** -0.001***
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Liabilities over GDP -0.005* -0.005* -0.006** -0.006** -0.005* -0.005* -0.005* -0.005* -0.004 -0.004 -0.005* -0.004
(0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003)
Overhead 0.019 0.019 0.017 0.018 0.019 0.019 0.019 0.019 0.019 0.019 0.018 0.019
(0.051) (0.051) (0.051) (0.051) (0.051) (0.051) (0.051) (0.051) (0.051) (0.050) (0.051) (0.051)
Short term debt -0.023*** -0.023*** -0.023*** -0.023*** -0.023*** -0.023*** -0.023*** -0.023*** -0.023*** -0.023*** -0.023*** -0.023***
(0.004) (0.004) (0.004) (0.004) (0.004) (0.004) (0.004) (0.004) (0.004) (0.004) (0.004) (0.004)
Inflation 0.134*** 0.134*** 0.135*** 0.134*** 0.134*** 0.134*** 0.134*** 0.134*** 0.134*** 0.132*** 0.134*** 0.133***
(0.026) (0.026) (0.026) (0.026) (0.026) (0.026) (0.026) (0.026) (0.026) (0.026) (0.026) (0.026)
GDP growth -0.088*** -0.088*** -0.088*** -0.088*** -0.087*** -0.087*** -0.087*** -0.087*** -0.088*** -0.087*** -0.088*** -0.088***
(0.025) (0.025) (0.026) (0.026) (0.025) (0.026) (0.025) (0.026) (0.025) (0.026) (0.025) (0.026)
GDP per capita 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Lagged profit -0.048 -0.047 -0.047 -0.047 -0.047 -0.047 -0.047 -0.047 -0.048 -0.048 -0.048 -0.048
(0.031) (0.031) (0.031) (0.031) (0.031) (0.031) (0.031) (0.031) (0.031) (0.031) (0.031) (0.031)
Lagged Asset volatility 0.034* 0.034* 0.035* 0.034* 0.034* 0.036 0.035* 0.034* 0.034* 0.019 0.034* 0.034*
(0.019) (0.020) (0.020) (0.020) (0.020) (0.170) (0.019) (0.020) (0.019) (0.029) (0.019) (0.020)
Foreign liabilities share 0.012 0.014 0.033*** 0.031*
(0.008) (0.013) (0.011) (0.016)
Lagged Asset volatility*Foreign liabilities
-0.040 0.085
share
(0.230) (0.370)
Concentration -0.013** -0.013
(0.006) (0.008)
45
Lagged Asset volatility*Concentration -0.001
(0.176)
International 0.001 0.001
(0.001) (0.001)
Lagged Asset volatility*International 0.003
(0.031)
Countries -0.000 -0.000
(0.000) (0.000)
Lagged Asset volatility*Countries 0.014
(0.018)
Log of countries 0.000 -0.000
(0.001) (0.001)
Lagged Asset volatility*Log of countries 0.012
(0.035)
N 3124 3124 3101 3101 3123 3123 3124 3124 3124 3124 3124 3124
R-sq 0.693 0.693 0.695 0.696 0.694 0.694 0.693 0.693 0.692 0.693 0.692 0.692
46
Table 9. A bank’s internationalization and bank interest expense controlling for asset volatility with bank fixed effects
The dependent variable is Interest expense, which is interest expense over bank liabilities excluding non-interest bearing debt. Assets is the natural logarithm of
total assets in constant 2000 US dollars. Liabilities over GDP is total bank liabilities divided by GDP. Overhead is personnel expenses and other non-interest
expenses over total assets. Short term debt is ratio of customer and short term funding to total interest paying debt. Inflation is rate of change in consumer prices.
GDP growth is rate of real per capita GDP growth. GDP per capita is GDP per capita in thousands of constant 2000 dollars. Lagged profit is pre-tax profits
divided by total assets, lagged one period. Lagged asset volatility is calculated as where stddev(E) is annualized standard deviation of weekly
dividend-inclusive bank stock returns, E is market value of common equity and V is t book value of assets minus the book value of common equity plus market
value of common equity, lagged one period. Foreign liabilities share is the sum of the liabilities of foreign subsidiary banks weighted by the parent bank’s
ownership share divided by the parent bank’s consolidated liabilities. Concentration is the sum of the squared shares of the liabilities weighted by the parent
bank’s ownership ship relative to the parent’s bank consolidated liabilities for all countries where the parent bank operates. International is a dummy variable
that equals 1 if a bank has a least 50% ownership of a foreign bank. Countries is the number of countries where a bank operates including the parent country. Log
of countries is the natural logarithm of the number of countries where a bank operates including the parent country. In regressions 3 and 4 we require the Foreign
liabilities share to be less than 0.3. We estimate all regressions using bank and year fixed effects. Robust standard errors are given in parentheses. *, ** and ***
denote significance at 10%, 5% and 1%.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
Assets 0.002 0.002 0.001 0.001 0.002 0.002 0.002 0.002 0.002 0.002 0.002 0.002
(0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002)
Liabilities over GDP -0.009* -0.008* -0.009* -0.009* -0.009* -0.008* -0.008* -0.008* -0.008* -0.008* -0.008* -0.008*
(0.004) (0.004) (0.005) (0.005) (0.004) (0.004) (0.004) (0.004) (0.004) (0.004) (0.004) (0.004)
Overhead 0.190*** 0.190*** 0.189*** 0.189*** 0.189*** 0.189*** 0.194*** 0.195*** 0.194*** 0.194*** 0.194*** 0.195***
(0.072) (0.072) (0.072) (0.072) (0.072) (0.072) (0.072) (0.072) (0.072) (0.072) (0.072) (0.072)
Short term debt -0.002 -0.002 -0.002 -0.002 -0.002 -0.002 -0.002 -0.002 -0.002 -0.002 -0.002 -0.002
(0.008) (0.008) (0.008) (0.008) (0.008) (0.008) (0.008) (0.008) (0.008) (0.008) (0.008) (0.008)
Inflation 0.107*** 0.107*** 0.108*** 0.108*** 0.108*** 0.108*** 0.106*** 0.105*** 0.107*** 0.107*** 0.107*** 0.106***
(0.019) (0.019) (0.019) (0.020) (0.019) (0.019) (0.019) (0.019) (0.019) (0.019) (0.019) (0.019)
GDP growth -0.082*** -0.082*** -0.083*** -0.082*** -0.082*** -0.082*** -0.083*** -0.081*** -0.082*** -0.082*** -0.082*** -0.082***
(0.025) (0.025) (0.025) (0.026) (0.025) (0.026) (0.025) (0.025) (0.025) (0.025) (0.025) (0.025)
GDP per capita -0.000 -0.000 -0.000 -0.000 -0.000 -0.000 -0.000 -0.000 -0.000 -0.000 -0.000 -0.000
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Lagged profit -0.018 -0.019 -0.018 -0.018 -0.018 -0.018 -0.017 -0.018 -0.018 -0.017 -0.017 -0.018
(0.028) (0.028) (0.028) (0.028) (0.028) (0.028) (0.027) (0.028) (0.027) (0.028) (0.027) (0.028)
Lagged Asset volatility -0.021 -0.021 -0.020 -0.022 -0.021 0.030 -0.021 -0.023 -0.020 -0.018 -0.020 -0.021
(0.017) (0.018) (0.017) (0.018) (0.017) (0.211) (0.017) (0.018) (0.017) (0.028) (0.017) (0.018)
Foreign liabilities share 0.016*** 0.014 0.020** 0.015
(0.005) (0.009) (0.008) (0.012)
Lagged Asset volatility*Foreign liabilities
0.075 0.184
share
(0.229) (0.435)
Concentration -0.012*** -0.010*
(0.004) (0.006)
47
Lagged Asset volatility*Concentration -0.051
(0.218)
International -0.001 -0.002*
(0.001) (0.001)
Lagged Asset volatility*International 0.021
(0.022)
Countries -0.000 -0.000
(0.000) (0.000)
Lagged Asset volatility*Countries -0.002
(0.016)
Log of countries -0.002 -0.002
(0.001) (0.001)
Lagged Asset volatility*Log of countries 0.006
(0.030)
N 3124 3124 3101 3101 3123 3123 3124 3124 3124 3124 3124 3124
R-sq 0.429 0.429 0.428 0.428 0.429 0.429 0.427 0.428 0.427 0.427 0.428 0.428
48
Table 10. Instrumental variable regressions for internationalization and bank interest expense controlling for asset volatility
The dependent variable is Interest expense, which is interest expense over bank liabilities excluding non-interest bearing debt. Assets is the natural logarithm of
total assets in constant 2000 US dollars. Liabilities over GDP is total bank liabilities divided by GDP. Overhead is personnel expenses and other non-interest
expenses over total assets. Short term debt is ratio of customer and short term funding to total interest paying debt. Inflation is rate of change in consumer prices.
GDP growth is rate of real per capita GDP growth. GDP per capita is GDP per capita in thousands of constant 2000 dollars. Lagged profit is pre-tax profits
divided by total assets, lagged one period. Lagged asset volatility is calculated as where stddev(E) is annualized standard deviation of weekly
dividend-inclusive bank stock returns, E is market value of common equity and V is the book value of assets minus the book value of common equity plus
market value of common equity, lagged one period. Foreign liabilities share is the sum of the liabilities of foreign subsidiary banks weighted by the parent
bank’s ownership share divided by the parent bank’s consolidated liabilities. Concentration is the sum of the squared shares of the liabilities weighted by the
parent bank’s ownership ship relative to the parent’s bank consolidated liabilities for all countries where the parent bank operates. International is a dummy
variable that equals 1 if a bank has a least 50% ownership of a foreign bank. Countries is the number of countries where a bank operates including the parent
country. Log of countries is the natural logarithm of the number of countries where a bank operates including the parent country. We estimate all regressions
using two-step GMM with country and year fixed effects. Country fixed effects and the constant are partialled out, without changing the results. The following
instruments are used: Tourism which is total number of tourist arrivals and departures over total population; FDI which is the sum of inward and outward flows
of foreign direct investments over GDP; Openness which is the sum of exports and imports of goods and services over GDP; Portfolio position which is the sum
of assets and liabilities with respect to a country’s portfolio investment position over GDP. We also report the coefficient estimates for the instrumental variables
in the first stage regression for Foreign liabilities share, the p-value of the F-test of joint significance of instruments in this first stage regression, the p-value of
the Hansen J-test of overidentifying restrictions, the Hausman specification error test of the difference between IV and OLS estimations as an endogeneity test,
and the p-value of an LM test regarding the correlation of exogenous instruments with endogenous instruments as a test of underidentification. In regressions 3
and 4 we require the instrumented Foreign liabilities share to be less than 0.3. The standard errors clustered at the bank level are given in parentheses. *, ** and
*** denote significance at 10%, 5% and 1%.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
Assets -0.001*** -0.001*** -0.001*** -0.001*** -0.001*** -0.001*** -0.001*** -0.001*** -0.001** -0.001** -0.001*** -0.001**
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.001) (0.000) (0.001)
Liabilities over GDP -0.008** -0.008** -0.010*** -0.010*** -0.009*** -0.009*** -0.011*** -0.012** -0.019* -0.029** -0.015** -0.020**
(0.003) (0.004) (0.003) (0.003) (0.003) (0.003) (0.004) (0.005) (0.010) (0.014) (0.006) (0.009)
Overhead 0.025 0.027 0.021 0.024 0.024 0.025 0.032 0.028 0.010 -0.003 0.023 0.016
(0.053) (0.048) (0.053) (0.048) (0.053) (0.048) (0.052) (0.047) (0.057) (0.054) (0.054) (0.050)
Short term debt -0.024*** -0.024*** -0.024*** -0.024*** -0.024*** -0.024*** -0.023*** -0.023*** -0.023*** -0.022*** -0.023*** -0.022***
(0.004) (0.004) (0.004) (0.004) (0.004) (0.004) (0.004) (0.004) (0.005) (0.005) (0.004) (0.004)
Inflation 0.145*** 0.149*** 0.147*** 0.151*** 0.147*** 0.150*** 0.164*** 0.166*** 0.163*** 0.181*** 0.163*** 0.177***
(0.026) (0.026) (0.026) (0.026) (0.026) (0.026) (0.025) (0.027) (0.026) (0.028) (0.025) (0.028)
GDP growth -0.126*** -0.126*** -0.133*** -0.132*** -0.126*** -0.127*** -0.131*** -0.133*** -0.149*** -0.167*** -0.138*** -0.150***
(0.030) (0.031) (0.030) (0.031) (0.030) (0.031) (0.031) (0.038) (0.031) (0.038) (0.029) (0.036)
GDP per capita 0.000 0.000 0.000** 0.000** 0.000 0.000 0.000* 0.000* 0.001** 0.001** 0.001** 0.001**
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Lagged profit -0.063* -0.065** -0.058* -0.063* -0.059* -0.063* -0.055 -0.055* -0.048 -0.045 -0.050 -0.048
(0.035) (0.032) (0.035) (0.032) (0.035) (0.032) (0.033) (0.029) (0.034) (0.032) (0.033) (0.030)
Lagged asset volatility 0.023 0.016 0.024 0.015 0.022 -0.381 0.022 0.021 0.024 0.157 0.022 0.024
49
(0.027) (0.017) (0.028) (0.016) (0.028) (0.602) (0.027) (0.017) (0.030) (0.109) (0.028) (0.017)
Foreign liabilities share 0.071** 0.093** 0.077** 0.083**
(0.029) (0.044) (0.030) (0.042)
Lagged asset volatility*Foreign -0.890 -0.389
liabilities share (1.169) (1.376)
Concentration -0.041*** -0.051**
(0.016) (0.023)
Lagged asset volatility 0.397
*Concentration (0.599)
International 0.010 0.011
(0.007) (0.010)
Lagged asset volatility* -0.065
International (0.198)
Countries 0.005 0.010*
(0.004) (0.006)
Lagged asset volatility*Countries -0.133
(0.104)
Log of countries 0.011 0.019*
(0.007) (0.011)
Lagged asset volatility*Log of -0.188
countries (0.198)
First Stage Regressions:
Tourism 0.030** 0.032** 0.025** 0.029*** -0.048** -0.053*** -0.05 -0.029 -0.208 -0.196 -0.055 -0.041
(0.013) (0.012) (0.011) (0.010) (0.020) (0.019) (0.076) (0.081) (0.188) (0.200) (0.071) (0.078)
FDI 0.058** 0.029 0.063*** 0.031 -0.114*** -0.055 0.597*** 0.681*** 1.489** 0.724 0.662*** 0.567**
(0.025) (0.032) (0.021) (0.024) (0.042) (0.047) (0.172) (0.186) (0.583) (0.640) (0.172) (0.235)
Openness 0.014 0.015 0.006 0.005 -0.019 -0.021 0.265 0.262 0.155 0.169 0.233 0.230
(0.030) (0.031) (0.027) (0.027) (0.050) (0.051) (0.193) (0.194) (0.772) (0.781) (0.231) (0.237)
Portfolio position 0.005 0.003 0.011 0.007 -0.011 -0.008 0.013 -0.028 0.303 0.343 0.044 0.027
(0.007) (0.010) (0.007) (0.008) (0.011) (0.013) (0.050) (0.057) (0.268) (0.306) (0.062) (0.072)
Lagged asset volatility*Tourism -0.115 -0.128 0.178 -0.775 -0.441 -0.482
(0.090) (0.087) (0.146) (0.593) (1.544) (0.596)
Lagged asset volatility*FDI 1.004 1.168 -2.127 -3.638 28.912* 3.455
(0.769) (0.712) (1.319) (5.656) (16.870) (5.009)
Lagged asset volatility*Openness 0.177 0.057 -0.177 1.081 -0.253 0.408
(0.110) (0.074) (0.149) (0.797) (2.133) (0.844)
Lagged asset volatility*Portfolio 0.176** 0.131* -0.226* 1.488** -0.073 0.840
position (0.087) (0.067) (0.122) (0.580) (1.183) (0.616)
N 2730 2730 2711 2711 2729 2729 2730 2730 2730 2730 2730 2730
R-sq 0.316 0.323 0.356 0.356 0.341 0.341 0.335 0.336 0.198 -0.088 0.295 0.226
Excluded instruments F-test 0.001 0.000 0.000 0.000 0.000 0.000 0.008 0.001 0.021 0.033 0.001 0.002
Hansen J-test (p-value) 0.418 0.874 0.356 0.763 0.380 0.829 0.060 0.318 0.071 0.488 0.066 0.394
Endogeneity test (p-value) 0.050 0.053 0.185 0.184 0.090 0.069 0.356 0.423 0.263 0.147 0.265 0.210
Underidentification test (p-value) 0.044 0.019 0.025 0.013 0.029 0.009 0.004 0.002 0.091 0.082 0.028 0.012
50
Table 11. A bank’s internationalization and unconsolidated bank interest expense
The dependent variable is Interest expense, unconsolidated which is interest expense over bank liabilities excluding non-interest bearing debt calculated using
unconsolidated statements of the parent bank. Assets is the natural logarithm of total assets in constant 2000 US dollars. Liabilities over GDP is total bank
liabilities divided by GDP. Overhead is personnel expenses and other non-interest expenses over total assets. Short term debt is ratio of customer and short term
funding to total interest paying debt. Inflation is rate of change in consumer prices. GDP growth is rate of real per capita GDP growth. GDP per capita is GDP
per capita in thousands of constant 2000 dollars. Lagged profit is pre-tax profits divided by total assets, lagged one period. Foreign liabilities share is the sum of
the liabilities of foreign subsidiary banks weighted by the parent bank’s ownership share divided by the parent bank’s consolidated liabilities. Concentration is
the sum of the squared shares of the liabilities weighted by the parent bank’s ownership ship relative to the parent’s bank consolidated liabilities for all countries
where the parent bank operates. International is a dummy variable that equals 1 if a bank has a least 50% ownership of a foreign bank. Countries is the number
of countries where a bank operates including the parent country. Log of countries is the natural logarithm of the number of countries where a bank operates
including the parent country. In regressions 3 and 4 we require the Foreign liabilities share to be less than 0.3. We estimate all regressions using country and
year fixed effects. The standard errors clustered at bank level are given in parentheses. *, ** and *** denote significance at 10%, 5% and 1%.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
Assets -0.001 -0.001 -0.001 -0.001 -0.001 -0.001 -0.000 -0.000 -0.000 -0.000 0.000 0.000
(0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.003) (0.002)
Liabilities over GDP -0.008 -0.007 -0.011 -0.011 -0.008 -0.008 -0.007 -0.008 -0.004 -0.005 -0.005 -0.006
(0.008) (0.008) (0.009) (0.009) (0.008) (0.008) (0.008) (0.008) (0.008) (0.008) (0.008) (0.008)
Overhead -0.119 -0.137 -0.095 -0.107 -0.119 -0.139 -0.122 -0.139 -0.093 -0.105 -0.098 -0.115
(0.137) (0.142) (0.138) (0.140) (0.137) (0.142) (0.137) (0.141) (0.137) (0.139) (0.137) (0.141)
Short term debt -0.046*** -0.045*** -0.046*** -0.044*** -0.046*** -0.044*** -0.046*** -0.043*** -0.048*** -0.046*** -0.047*** -0.045***
(0.013) (0.013) (0.013) (0.013) (0.013) (0.013) (0.013) (0.012) (0.013) (0.013) (0.013) (0.013)
Inflation 0.051* 0.047* 0.051* 0.044* 0.051* 0.045* 0.054** 0.047** 0.053** 0.049** 0.053** 0.048**
(0.027) (0.024) (0.027) (0.022) (0.027) (0.024) (0.026) (0.022) (0.026) (0.023) (0.026) (0.022)
GDP growth 0.010 0.015 0.010 0.018 0.011 0.017 -0.000 0.004 0.005 0.006 0.001 0.004
(0.044) (0.043) (0.044) (0.042) (0.044) (0.043) (0.044) (0.043) (0.044) (0.044) (0.044) (0.043)
GDP per capita -0.000 -0.000 -0.000 -0.000 -0.000 -0.000 -0.000 -0.000 -0.000 -0.000 -0.000 -0.000
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Lagged profit 0.137 0.170 0.134 0.187 0.137 -1.381** 0.137 0.188 0.138 0.363** 0.137 0.182
(0.110) (0.117) (0.110) (0.119) (0.110) (0.659) (0.111) (0.121) (0.111) (0.183) (0.112) (0.119)
Foreign liabilities share 0.012 0.040 0.024 0.070***
(0.014) (0.025) (0.023) (0.027)
Lagged profit*Foreign liabilities share -2.294 -3.924***
(1.680) (1.062)
Concentration -0.009 -0.029**
(0.011) (0.014)
Lagged profit*Concentration 1.560**
(0.737)
International -0.008** -0.004
(0.004) (0.004)
Lagged profit*International -0.314**
51
(0.128)
Countries -0.003*** -0.001
(0.001) (0.001)
Lagged profit*Countries -0.192*
(0.100)
Log of countries -0.010*** -0.006
(0.004) (0.004)
Lagged profit*Log of countries -0.383**
(0.178)
N 1378 1378 1360 1360 1377 1377 1378 1378 1378 1378 1378 1378
R-sq 0.361 0.364 0.357 0.363 0.361 0.365 0.365 0.369 0.366 0.369 0.368 0.372
52
Table 12. A bank’s internationalization and unconsolidated bank interest expense with bank fixed effects
The dependent variable is Interest expense, unconsolidated which is interest expense over bank liabilities excluding non-interest bearing debt calculated using
unconsolidated statements of the parent bank. Assets is the natural logarithm of total assets in constant 2000 US dollars. Liabilities over GDP is total bank
liabilities divided by GDP. Overhead is personnel expenses and other non-interest expenses over total assets. Short term debt is ratio of customer and short term
funding to total interest paying debt. Inflation is rate of change in consumer prices. GDP growth is rate of real per capita GDP growth. GDP per capita is GDP
per capita in thousands of constant 2000 dollars. Lagged profit is pre-tax profits divided by total assets, lagged one period. Foreign liabilities share is the sum of
the liabilities of foreign subsidiary banks weighted by the parent bank’s ownership share divided by the parent bank’s consolidated liabilities. Concentration is
the sum of the squared shares of the liabilities weighted by the parent bank’s ownership ship relative to the parent’s bank consolidated liabilities for all countries
where the parent bank operates. International is a dummy variable that equals 1 if a bank has a least 50% ownership of a foreign bank. Countries is the number
of countries where a bank operates including the parent country. Log of countries is the natural logarithm of the number of countries where a bank operates
including the parent country. In regressions 3 and 4 we require the Foreign liabilities share to be less than 0.3. We estimate all regressions using bank and year
fixed effects. The standard errors are given in parentheses. *, ** and *** denote significance at 10%, 5% and 1%.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
Assets 0.004 0.004 0.004 0.004 0.004 0.004 0.005 0.005 0.004 0.005 0.005 0.005
(0.007) (0.007) (0.007) (0.007) (0.007) (0.007) (0.007) (0.007) (0.007) (0.007) (0.007) (0.007)
Liabilities over GDP -0.001 -0.001 0.000 -0.000 -0.001 -0.001 -0.002 -0.003 0.001 -0.002 0.000 -0.002
(0.011) (0.010) (0.010) (0.010) (0.011) (0.011) (0.011) (0.010) (0.010) (0.010) (0.010) (0.010)
Overhead 0.181 0.200* 0.185 0.205* 0.178 0.197* 0.182 0.192 0.183 0.190 0.184 0.191
(0.121) (0.116) (0.121) (0.116) (0.121) (0.116) (0.123) (0.119) (0.123) (0.120) (0.123) (0.120)
Short term debt -0.041 -0.040 -0.040 -0.039 -0.041 -0.039 -0.040 -0.037 -0.042 -0.040 -0.041 -0.039
(0.044) (0.043) (0.044) (0.044) (0.044) (0.043) (0.044) (0.043) (0.044) (0.043) (0.044) (0.043)
Inflation 0.042** 0.037** 0.041** 0.035** 0.042** 0.036** 0.043** 0.037** 0.042** 0.040** 0.043** 0.038**
(0.020) (0.017) (0.019) (0.017) (0.020) (0.017) (0.020) (0.017) (0.020) (0.018) (0.020) (0.017)
GDP growth -0.029 -0.024 -0.030 -0.026 -0.028 -0.024 -0.032 -0.031 -0.029 -0.030 -0.031 -0.031
(0.041) (0.040) (0.042) (0.040) (0.041) (0.040) (0.039) (0.038) (0.041) (0.040) (0.039) (0.038)
GDP per capita -0.000 -0.000 0.000 0.000 -0.000 -0.000 -0.000 -0.000 -0.000 -0.000 -0.000 -0.000
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Lagged profit 0.117 0.172 0.116 0.176 0.115 -1.456** 0.118 0.192 0.117 0.332 0.118 0.182
(0.155) (0.174) (0.156) (0.176) (0.156) (0.634) (0.154) (0.180) (0.154) (0.250) (0.154) (0.175)
Foreign liabilities share 0.001 0.035 0.032 0.072**
(0.025) (0.032) (0.023) (0.033)
Lagged profit*Foreign liabilities share -2.923* -3.174**
(1.550) (1.485)
Concentration -0.006 -0.025
(0.017) (0.021)
Lagged profit*Concentration 1.629**
(0.794)
International -0.004 0.001
(0.006) (0.007)
Lagged profit*International -0.333**
53
(0.156)
Countries -0.001 0.001
(0.001) (0.002)
Lagged profit*Countries -0.173
(0.107)
Log of countries -0.005 -0.001
(0.006) (0.007)
Lagged profit*Log of countries -0.395*
(0.203)
N 1378 1378 1360 1360 1377 1377 1378 1378 1378 1378 1378 1378
R-sq 0.054 0.061 0.051 0.060 0.054 0.061 0.055 0.065 0.054 0.060 0.056 0.064
54
Table 13. A bank’s internationalization and deposit growth rates
The dependent variable is Deposit growth, which is the growth rate of a bank's customer and short term funding after dividing by the GDP deflator in percent.
Assets is the natural logarithm of total assets in constant 2000 US dollars. Liabilities over GDP is total bank liabilities divided by GDP. Overhead is personnel
expenses and other non-interest expenses over total assets. Inflation is rate of change in consumer prices. GDP growth is rate of real per capita GDP growth.
GDP per capita is GDP per capita in thousands of constant 2000 dollars. Lagged profit is pre-tax profits divided by total assets, lagged one period. Foreign
liabilities share is the sum of the liabilities of foreign subsidiary banks weighted by the parent bank’s ownership share divided by the parent bank’s consolidated
liabilities. Concentration is the sum of the squared shares of the liabilities weighted by the parent bank’s ownership ship relative to the parent’s bank
consolidated liabilities for all countries where the parent bank operates. International is a dummy variable that equals 1 if a bank has a least 50% ownership of a
foreign bank. Countries is the number of countries where a bank operates including the parent country. Log of countries is the natural logarithm of the number of
countries where a bank operates including the parent country. In regressions 3 and 4 we require the Foreign liabilities share to be less than 0.3. We estimate all
regressions using country and year fixed effects. The standard errors clustered at bank level are given in parentheses.*, ** and *** denote significance at 10%,
5% and 1%.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
Assets 0.005 0.005 0.006 0.006 0.005 0.005 0.006 0.006 0.006 0.005 0.006 0.006
(0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005)
Liabilities over GDP 0.009 0.010 -0.001 -0.001 0.011 0.011 0.012 0.015 0.012 0.014 0.013 0.016
(0.055) (0.055) (0.056) (0.056) (0.055) (0.054) (0.055) (0.055) (0.057) (0.057) (0.056) (0.057)
Overhead -0.760 -0.759 -0.737 -0.735 -0.761 -0.755 -0.764 -0.742 -0.755 -0.736 -0.757 -0.733
(0.661) (0.662) (0.664) (0.665) (0.661) (0.662) (0.660) (0.663) (0.662) (0.666) (0.661) (0.665)
Inflation -0.301* -0.300* -0.298* -0.296* -0.300* -0.298* -0.303* -0.300* -0.303* -0.304* -0.303* -0.303*
(0.162) (0.162) (0.163) (0.164) (0.162) (0.162) (0.162) (0.162) (0.161) (0.162) (0.161) (0.162)
GDP growth 0.317 0.317 0.322 0.320 0.316 0.315 0.305 0.302 0.318 0.316 0.313 0.310
(0.259) (0.259) (0.261) (0.260) (0.259) (0.259) (0.259) (0.259) (0.259) (0.259) (0.259) (0.259)
GDP per capita -0.001 -0.001 -0.000 -0.000 -0.001 -0.001 -0.001 -0.001 -0.001 -0.001 -0.001 -0.001
(0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003)
Lagged profit 0.522 0.518 0.514 0.499 0.520 1.626 0.515 0.436 0.520 0.018 0.517 0.442
(0.374) (0.395) (0.374) (0.404) (0.374) (3.113) (0.371) (0.406) (0.374) (0.751) (0.372) (0.405)
Foreign liabilities share -0.048 -0.054 -0.151 -0.171
(0.055) (0.074) (0.103) (0.106)
Lagged profit*Foreign liabilities share 0.368 1.607
(3.438) (5.836)
Concentration 0.045 0.060
(0.052) (0.058)
Lagged profit*Concentration -1.129
(3.327)
International -0.015 -0.025*
(0.015) (0.015)
Lagged profit*International 0.721
(0.641)
Countries -0.002 -0.006
55
(0.004) (0.005)
Lagged profit*Countries 0.447
(0.463)
Log of countries -0.010 -0.021
(0.013) (0.014)
Lagged profit*Log of countries 0.918
(0.844)
N 3740 3740 3706 3706 3738 3738 3740 3740 3740 3740 3740 3740
R-sq 0.067 0.067 0.068 0.068 0.067 0.067 0.067 0.068 0.067 0.068 0.067 0.068
56
Table 14. A bank’s internationalization and deposit growth rates with bank fixed effects
The dependent variable is Deposit growth, which is the growth rate of a bank's customer and short term funding after dividing by the GDP deflator in percent.
Assets is the natural logarithm of total assets in constant 2000 US dollars. Liabilities over GDP is total bank liabilities divided by GDP. Overhead is personnel
expenses and other non-interest expenses over total assets. Inflation is rate of change in consumer prices. GDP growth is rate of real per capita GDP growth.
GDP per capita is GDP per capita in thousands of constant 2000 dollars. Lagged profit is pre-tax profits divided by total assets, lagged one period. Foreign
liabilities share is the sum of the liabilities of foreign subsidiary banks weighted by the parent bank’s ownership share divided by the parent bank’s consolidated
liabilities. Concentration is the sum of the squared shares of the liabilities weighted by the parent bank’s ownership ship relative to the parent’s bank
consolidated liabilities for all countries where the parent bank operates. International is a dummy variable that equals 1 if a bank has a least 50% ownership of a
foreign bank. Countries is the number of countries where a bank operates including the parent country. Log of countries is the natural logarithm of the number of
countries where a bank operates including the parent country. In regressions 3 and 4 we require the Foreign liabilities share to be less than 0.3. We estimate all
regressions using bank and year fixed effects. Robust standard errors are given in parentheses. *, ** and *** denote significance at 10%, 5% and 1%.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
Assets 0.237*** 0.239*** 0.238*** 0.239*** 0.238*** 0.239*** 0.237*** 0.239*** 0.238*** 0.237*** 0.238*** 0.240***
(0.051) (0.051) (0.051) (0.051) (0.051) (0.051) (0.050) (0.050) (0.051) (0.051) (0.051) (0.051)
Liabilities over GDP 0.009 0.010 0.029 0.028 0.011 0.011 -0.001 0.001 0.007 0.014 0.002 0.007
(0.271) (0.271) (0.293) (0.293) (0.271) (0.271) (0.271) (0.271) (0.272) (0.271) (0.270) (0.270)
Overhead -0.116 -0.206 -0.132 -0.197 -0.135 3.694 -0.106 -0.327 -0.118 -1.245 -0.114 -0.339
(0.594) (0.653) (0.596) (0.659) (0.594) (4.270) (0.596) (0.680) (0.595) (1.130) (0.595) (0.670)
Inflation -2.916*** -2.922*** -2.863*** -2.878*** -2.914*** -2.919*** -2.948*** -2.949*** -2.933*** -2.945*** -2.933*** -2.935***
(1.016) (1.014) (1.028) (1.025) (1.017) (1.015) (1.015) (1.013) (1.016) (1.015) (1.018) (1.016)
GDP growth -0.081 -0.076 -0.081 -0.077 -0.077 -0.073 -0.086 -0.079 -0.085 -0.086 -0.085 -0.084
(0.181) (0.181) (0.182) (0.182) (0.182) (0.182) (0.181) (0.182) (0.179) (0.181) (0.180) (0.182)
GDP per capita 0.514* 0.511* 0.525* 0.520* 0.516* 0.513* 0.496 0.488 0.510* 0.500 0.503 0.492
(0.310) (0.309) (0.314) (0.313) (0.309) (0.309) (0.309) (0.307) (0.309) (0.308) (0.309) (0.307)
Lagged profit -0.003 -0.003 -0.003 -0.003 -0.003 -0.003 -0.003 -0.003 -0.003 -0.003 -0.003 -0.003
(0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003) (0.003)
Foreign liabilities share -0.249** -0.353*** -0.281 -0.357*
(0.117) (0.136) (0.190) (0.182)
Lagged profit*Foreign liabilities share 8.043 6.083
(8.079) (9.036)
Concentration 0.191* 0.245**
(0.102) (0.099)
Lagged profit*Concentration -3.916
(4.740)
International -0.024 -0.045
(0.034) (0.031)
Lagged profit*International 1.530*
(0.900)
Countries -0.008 -0.016**
(0.008) (0.008)
57
Lagged profit*Countries 0.961
(0.593)
Log of countries -0.024 -0.048*
(0.031) (0.028)
Lagged profit*Log of countries 2.015*
(1.125)
N 3740 3740 3706 3706 3738 3738 3740 3740 3740 3740 3740 3740
R-sq 0.080 0.080 0.080 0.081 0.080 0.080 0.079 0.081 0.079 0.081 0.079 0.081
58
Figure 1. Distribution of a bank’s foreign liabilities share
This figure shows the distribution of Foreign liabilities share, which is the sum of the liabilities of foreign
subsidiary banks weighted by the parent bank’s ownership share divided by the parent bank’s consolidated
liabilities. Information in the figure is limited to the 1280 observations, out of a total of 3684 observations, with a
positive Foreign liabilities share. Two observations with a value higher than 1 are also excluded.
800
712
600
Frequency
400
197
200
98
72
39 44 27
19 12 9 11 9 6 5
4 5 1 1 2 1 3 1 2
0
0 .05 .1 .15 .2 .25 .3 .35 .4 .45 .5 .55 .6 .65 .7
FLweighted
Figure 2. Distribution of a bank’s liability concentration
This figure shows the distribution of Concentration, which is the sum of the squared shares of the liabilities
weighted by the parent bank’s ownership ship relative to the parent’s bank consolidated liabilities for all countries
where the parent bank operates. Information in the figure is limited to the 1279 observations, out of a total of 3682
observations, with a Concentration of less than one, indicating some foreign liabilities.
300
277
257
200
Frequency
138
123
100
67
54
46
3337
24 2329
16131719 20
1010 7 6 8 6 9 13
3 1 2 1 1 1 2 1 5
0
.25 .3 .35 .4 .45 .5 .55 .6 .65 .7 .75 .8 .85 .9 .95 1
Hw
59
Figure 3. Distribution of the number of countries where a bank operates
This figure shows the distribution of Countries, which is the number of countries where a bank operates majority-
owned banks including the parent country. Information in the figure is limited to the 991 observations, out of a total
of 3684 observations, of banks with some liabilities in majority-owned foreign subsidiaries.
600
559
400
Frequency
221
200
84
43 38
19 11
3 2 2 5 2 1 1
0
0 5 10 15 20
n
60