Internationalization and geopolitical risk: impacts on bank profitability and risk

Abstract

Internationalization represents an unavoidable trend for the sustenance of long-term sustainability within the contemporary, intensely competitive banking industry. Moreover, geopolitical risks constitute a distinctive factor that significantly influences the situation of countries. Nevertheless, the pertinent question arises: does internationalization serve to augment the profitability of banks, or does it merely elevate associated risks, and in how do geopolitical risks impact banks? Consequently, this study seeks to investigate the repercussions of internationalization and geopolitical risks on the profitability and risks of commercial banks operating in Vietnam. Employing a research sample comprising 549 observations from the period spanning 2008 to 2023, and utilizing estimation methodologies such as Random Effects Model (REM), and Generalized Method of Moments (GMM). The findings reveal that a negative correlation is present between internationalization and geopolitical risk with bank risk. The results derived from the study pertaining to bank profitability indicate that the process of internationalization exerts a negative impact, whereas geopolitical risk demonstrates a positive impact on profitability. Furthermore, the interplay between bank risk and profitability during the pursuit of internationalization activities and under the influence of geopolitical risk is also examined. Based on these findings, the authors additionally recommend a series of appropriate strategies aimed at improving profitability and mitigating risks within banking institutions.