Cross-Border Banking: The Risk of National Champions

Macroeconomic developments are important for bank profitability. Country risk is therefore an important determinant of the riskiness of banks. In this research the downside risk of multiple combinations of banks in the EU is modelled by a factor model, explicitly taking into account country risk. The model shows that bank mergers have a negative effect on systemic risk, but cross-border mergers may reduce risk for individual financial institutions. The scope for risk reduction by mergers within a given country, creating so called National Champions, is more limited. Downside risk dependence of banks is also estimated. The results indicate that in general the dependence between banks based in the same country is higher and that the dependence did increase after the introduction of the euro.