THE RELATIONSHIP BETWEEN FOREIGN OWNERSHIP AND BANK RISK-TAKING: A NEW EVIDENCE FROM CANADA

Devon Locke

doi:10.36690/2674-5208-2025-1-74-84

Authors

Devon Locke St. Thomas University

DOI:

https://doi.org/10.36690/2674-5208-2025-1-74-84

Keywords:

bank risk-taking, random effect, system GMM, foreign ownership, Canadian banks, corporate governance, financial regulation, risk management, panel data analysis, ownership structure

Abstract

This study investigates the dynamic relationship between foreign ownership and bank risk-taking within the Canadian banking sector. The purpose of the research is to assess whether increased foreign participation in bank equity has a stabilizing or destabilizing effect on institutional risk levels. Given the progressive liberalization of ownership structures in Canada's banking industry, the study provides a timely analysis of how international capital affects risk behavior in a mature financial environment. The central aim is to explore whether foreign stakeholders act as risk-mitigators or risk-enhancers in the operational strategies of commercial banks. To explore this relationship, the research adopts a panel data methodology using information collected from a sample of Canadian commercial banks over a multi-year period. The model specification includes lagged dependent variables and a series of financial and macroeconomic control variables. Three estimation techniques—Ordinary Least Squares (OLS), Random Effects (RE), and the Generalized Method of Moments (GMM)—are employed to ensure robustness and correct for potential endogeneity. The inclusion of lagged risk indicators helps capture temporal stability effects, while foreign ownership ratios are introduced to isolate the influence of international participation in equity holdings. In addition, macroeconomic indicators such as inflation and GDP growth are used to control for external financial shocks that may influence bank behavior. The results indicate a statistically significant and consistent negative relationship between foreign ownership and bank risk. In all model specifications, banks with higher levels of foreign equity participation demonstrated lower risk, as measured by standard financial stability metrics. These findings suggest that foreign owners, by bringing improved governance standards, global oversight practices, and reputational discipline, help reduce risk-taking behavior in the banking system. Furthermore, the presence of lagged positive effects in the model implies that previous periods of stability reinforce future risk moderation, pointing to a cumulative effect of prudent banking practices. This pattern is particularly pronounced in larger banks, where international partnerships are more common and oversight structures more developed. The study concludes that foreign ownership in Canadian banks serves as a constructive force for risk management, offering valuable policy implications for financial regulators and institutional investors seeking to enhance resilience in banking systems.

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Author Biography

Devon Locke, St. Thomas University

St. Thomas University, New Brunswick

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