Empirical Study on Bank Internationalization, Market Power and Risk: Endogeneity Model

　　Focusing on 36 Taiwanese local banks in the period of 2010 to 2013, this study investigate degree of internationalization of these Taiwanese banks, and how the degree of internationalization affect market power and risk of these banks. Degree of internationalization includes three aspects: foreign asset, foreign income and the number of foreign branches, which were composed into a internationalization index using principal component analysis. Next, we estimate market power of each bank using stochastic frontier analysis. Finally, we use multi-regression model and endogeneity model to capture the relation of internationalization, market power and risk. Followings are our conclusion:
1.Policy bank has the lowest market power in Taiwan, followed by foreign capital bank and industrial bank. State-owned and commercial bank have the best market power, while commercial bank is slightly better than state-owned bank.
2.Policy bank has the lowest risk, followed by state-owned, then industrial. Foreign capital and commercial bank both are highest.
3.Increase of the internationalization and weight of foreign income will enhance market power of individual bank, while increase of foreign asset will lower market power.
4.Increase of the internationalization and weight of foreign income will increase operational risk, while increase of foreign asset will lower risk.
5.There exist an endogenous relation between bank’s market power and risk. The decision of banks business model and internationalization strategy will simultaneously decide market power and operational risk.