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Banks' Capital Structure and US dollar Diversification of Assets: Does Reduction in Systemic Risk Offset Agency Costs?

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  • Justine Pedrono

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

  • Aurélien Violon

    (Banque de France - ACPR)

Abstract

Multinational Corporation (MNCs) should gain advantage from international diversification by lowering their systemic risk and reducing their bankruptcy cost. Hence, internationalization should induce larger leverage. However, it may imply additional agency costs due to wider informal gaps and higher cost of investigation induced by the multiplication of markets. To examine how currency diversification of asset may change the bank's systemic risk, we provide a theoretical framework based on relative CAPM by introducing explicitly the exchange rate risk. Due to exchange rate dynamics asset diversification may reduce systemic risk even through the two assets are perfectly correlated. Using innovative micro data on credit institutions located in France between 1999 and 2014 we expand our analysis to the net effect of US dollar diversification of assets. Contrary to past studies, this measure of financial internationalization take into consideration the exchange rate risk. Although our results highlight the two opposite effects of diversification, they posit the importance of international agency costs in the capital structure decision.

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  • Justine Pedrono & Aurélien Violon, 2016. "Banks' Capital Structure and US dollar Diversification of Assets: Does Reduction in Systemic Risk Offset Agency Costs?," Working Papers halshs-01275858, HAL.
    • Handle: RePEc:hal:wpaper:halshs-01275858
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01275858
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    Cited by:

    1. Justine Pedrono, 2016. "Currency Diversification of Banks: A Spontaneous Buffer Against Financial Losses," Working Papers halshs-01275862, HAL.

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    More about this item

    Keywords

    bank; capital structure; leverage; currency; diversification; internationalization;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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