Global Journal of Commerce & Management Perspective
Open Access

The Implications of Global Expansion Techniques on Bank’s Performance

Lerch Lunardi^{* *}Correspondence: Lerch Lunardi, Department of Economics and Finance, Xi'an Jiaotong University, Shaanxi, China, Email:

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Within the larger discussion of how financial integration and international banking impact the world financial economy is the impact of cross-border diversity on bank performance. Globally, the majority of the empirical research looking into this relationship yield inconsistent findings. Research from both ends of the expansion debate reveal that while cross-border diversification boosts bank performance, it also raises the danger of bank failure and systemic instability. However, this line of argument hasn't been looked at in relation to Japanese "city banks" operating abroad. This study determines the impact of cross-border growth activities on bank performance and if crossborder diversity enhances the performance of Japanese banks. The latter was not given much attention in earlier research. According to the study, cross-border diversification generally increases cost efficiency but reduces or adversely affects the banks' examined profit efficiency.

Specifically, financing risks and operational inefficiencies are associated with diversification activities like expanding overseas branches and acquiring international assets. The study comes to the conclusion that, in order to avert instances of regional financial crises, Japanese banks' current trend of cross-border expansion operations needs to be closely watched and supervised. Furthermore, it is necessary to reevaluate these banks' present cross-border diversification tactics, particularly with regard to the development and management of international branch networks (retail banking). The cross-border banking literature highlights the practical significance of the effects of cross-border diversity on MNB performance. Numerous empirical investigations have endeavored to address this inquiry, yielding a range of outcomes and deductions. The diversification (expansion) hypothesis states that increased profits, the generation of shareholder value, a decrease in systemic risk exposure, and economies of scale and scope are all results of cross-border diversification. Several of these advantages have been verified by extensive empirical research.Cross-border diversification gives large Bank Holding Companies (BHCs) a scale advantage, more leverage, and lower risks, as demonstrated by Demsetz and Strahan (1997).

In a different study, it was discovered that geographic proximity of branches to BHCs has a significant influence in both valueenhancing and risk-reducing activities, and that cross-border diversity increases value and lowers risk in BHCs. However, some researchers have discovered that cross-border banking does not always offer the anticipated benefits, which is consistent with the market risk theory, which contends that diversity raises bank risk because of market-specific features in host countries. Current research demonstrates the dynamics of default cascades in a network of hypothetically diversified credit interlinkages and concludes that systemic risks are not mitigated by individual risk diversification among counterparties. Following the global financial crises, a similar study of twenty-two large banks in Asia and the Pacific revealed that increased risk aversion and liquidity constraints in the global financial markets, which stemmed from the US subprime crisis, were the primary drivers of the crisis's spillover effect. MNBs can reduce risk by diversifying their portfolios, but this can be countered by incentives that take on excessive risk. The authors analyze a sample of 384 banks in more than 50 countries using zscore, predicted default frequency, and other risk metrics. They conclude that bank risk is increased by worldwide diversification. Ultimately, it was shown that because US foreign banks have less stringent lending requirements for business clients, they are far riskier than US domestic banks. The authors concluded that bank risk is increased by internationalization, particularly in times of market crisis, by demonstrating that a higher marginal degree of internationalization within the subset of internationalized banks is linked to higher risk.