Effects of Global Expansion, Credit Derivatives, Mergers and Acquisitions, and Country Risk on Banks' Texas Ratios

The purpose of this study was to investigate the correlation between increased banks' risk,as measured by the banks' Texas ratio, and aspects of economic globalization that include banks' global expansion, increased use of credit derivatives, mergers and acquisitions, and country risk. Banks are a key economic conduit in any economy. U.S. banks' Texas ratios have been increasing since 2002, reaching their highest point in 2009. Prior to the 2007-2009 Great Recession, the financial sector experienced many changes. These changes increased banks' profitability but they also eroded risk management as evidenced by increasing Texas ratios. The theoretical foundation of this study included the effects of global banks' expansion, increased use of credit derivatives, mergers and acquisitions, and country risk on the banks' Texas ratios. Multiple regression was employed to analyze archival data from 2002 to 2010 in a 3 stages approach: pre-crisis stage, during crisis, and after crisis stage. Results of nultiple regression, t-tests, and ANOVA analyses indicated that increased use of credit derivatives, mergers and acquisitions, and country risk increased banks' Texas ratios during crisis stage. Global banks' expansion reduced banks' Texas ratios. None of the variables had a significant effect on banks' Texas ratios for pre-crisis stage. After crisis stage, analysis showed a significant effect but with a very low coefficient of determinant. The findings of this study would result in stronger banks due to increased risk awareness in the sector. The social implications include continued employment, availability of credit for the communities where stronger banks serve, and inform the efforts towards fewer bank failures. These aspects improve the social and financial well-being of the community.