'Towards a Theory of Global Bank Risk Taking and Competition'
Direct involvement of global banks in local retail activities can reduce risk-taking by promoting local competition. We develop this argument through a simple model in which imperfectly competitive banks are allowed to operate simultaneously in different national markets only if they are directly involved in local retail activities both on the deposits and the loans sides. The model generates predictions that are consistent with the foregoing argument as long as the elasticity of firms’ loans demand to the loan interest rate is large relative to the elasticity of consumers’ deposits supply to the deposit interest rate. When this is the case, banking globalization also moderates the contraction in the number of banks, in total deposits and loans, in the returns on deposits and loans, and in the success probability of firms’ projects following a deterioration in the investment climate.