The Implications of Cross Border Banking and Funding Strategy for Risk and Return

Abstract

This paper investigates the effects of cross-border banking and funding modes on risk and return. We sample 320 banks across 29 African countries and employ System GMM estimator as a methodological approach to shed further light on the funding sources-stability nexus by examining the complex interaction between three key constructs: cross-border banking, funding strategy, and bank stability and return. We find that though cross border banking increases insolvency risk, it promotes deposit funding which in turn decreases insolvency risk, implying that when banks cross border, they reduce their inherent instability by employing more of less risky deposit funds and less of wholesale and internally generated funds. Our results also suggest that banks that finance their operations with deposit funds are more profitable than those who employ wholesale and internal funds.