Effect of Financial Globalization on Bank Risk: Role of Rollover Risk

Posted: 28 Jun 2017

See all articles by Xiang Li

Xiang Li

Peking University - National School of Development

Dan Su

University of Minnesota - Twin Cities - Carlson School of Management

Date Written: June 28, 2017

Abstract

This paper investigates the effects of financial globalization on bank risk by highlighting the role of rollover risk. We extend the canonical rollover risk model by allowing an “active” bank manager to choose excessive risk-taking or systemic risk-shifting actions. Financial globalization is characterized by an increase in investors’ opportunity cost, which affects the coordination problem among short-term creditors, and changes banks’ incentives for risk-taking and systemic risk-shifting. The model generates three predictions and we provide robust empirical evidence to verify them: (1) In the short term, financial globalization will induce those banks with more short-term funding to be more risk-taking; (2) The mid-tier banks are more sensitive to the effects of financial globalization and will become more risk-taking than the rest; and (3) In the long term, financial globalization tends to affect the systemic risk in the financial system, but the precise effects depend on the country’s economic fundamentals and institutional quality.

Keywords: financial globalization; risk-taking; systemic risk-shifting; rollover risk

JEL Classification: F32; G33; G38

Suggested Citation

Li, Xiang and Su, Dan, Effect of Financial Globalization on Bank Risk: Role of Rollover Risk (June 28, 2017). Available at SSRN: https://ssrn.com/abstract=2994413 or http://dx.doi.org/10.2139/ssrn.2994413

Xiang Li

Peking University - National School of Development ( email )

Beijing, 100871
China

Dan Su (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

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