Global bank complexity and financial fragility around the world

Abstract

Using data for 123 countries from 1996 to 2020, we uncover the effect of foreign-owned banks’ geographic complexity on financial fragility in the context of financial liberalization. We compute a measure of foreign-owned banks’ geographic complexity for each country from data on the affiliate network of internationally active banking institutes. The financial effects of geographic complexity may help banks improve their survival by improving their solvency. After extensive testing for the sensitivity of the results, our main findings were threefold. First, a higher degree of geographic complexity of foreign-owned banks reduces the likelihood of a bank’s default, and these effects become more pronounced in low- and lower-middle-income countries. Second, the effects of financial liberalization vary across income groups. Third, the joint effects of foreign-owned banks’ geographic complexity and financial liberalization on financial fragility vary across forms of financial liberalization. Our findings have several policy implications: first, bank supervisors should consider the presence and structure of foreign bank ownership in their assessments; second, the government should take into account the level of economic development in choosing the proper form of financial liberalization; third, the government should promote financial freedom to strengthen the role of foreign-owned banks’ geographic complexity in alleviating financial fragility. • Using data for 123 countries from 1996 to 2020, we uncover the effect of foreign-owned bank geographic complexity on financial fragility in the context of financial liberalization. • From data on the affiliate network of internationally active banking institutes, we compute a measure of foreign-owned bank geographic complexity for each country. The financial effects of bank geographic complexity may help banks improve their survivals by improving their solvency. • After extensive testing for the sensitivity of the results, our main findings include three folds. First, a higher degree of foreign-owned bank geographic complexity reduces the likelihood of a bank’s default, and these effects become more pronounced in low and lower-middle-income country. Second, the effects of financial liberalization are varied across income groups. Third, the joint effects of foreign-owned bank geographic complexity and financial liberalization on financial fragility are varied across the forms of financial liberalization. • Our findings suggest several policy implications: first, bank supervisors should consider the presence and the structure of foreign bank ownership in their assessment; second, the government should take into account the level of economic development to choose the proper form of financial liberalization; third, the government should promote the financial freedom in order to strengthen the role of foreign-owned bank geographic complexity in alleviating the financial fragility.