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Financial integration, specialization, and systemic risk

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  • Fecht, Falko
  • Grüner, Hans Peter
  • Hartmann, Philipp

Abstract

This paper studies the implications of cross-border financial integration for financial stability when banks' loan portfolios adjust endogenously. Banks can be subject to sectoral and aggregate domestic shocks. After integration they can share these risks in a complete interbank market. When banks have a comparative advantage in providing credit to certain industries, financial integration may induce banks to specialize in lending. An enhanced concentration in lending does not necessarily increase risk, because a well-functioning interbank market allows to achieve the necessary diversification. This greater need for risk sharing, though, increases the risk of cross-border contagion and the likelihood of widespread banking crises. However, even though integration increases the risk of contagion it improves welfare if it permits banks to realize specialization benefits.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 88 (2012)
Issue (Month): 1 ()
Pages: 150-161

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Handle: RePEc:eee:inecon:v:88:y:2012:i:1:p:150-161

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Web page: http://www.elsevier.com/locate/inca/505552

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Keywords: Financial integration; Specialization; Interbank market; Financial contagion;

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References

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Citations

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Cited by:
  1. Gurnain Kaur Pasricha, 2010. "Bank Competition and International Financial Integration: Evidence Using a New Index," Working Papers 10-35, Bank of Canada.
  2. Kerstin Gerling, 2008. "The Real Consequences of Financial Market Integration when Countries Are Heterogeneous," Working Papers 141, Oesterreichische Nationalbank (Austrian Central Bank).
  3. Bräuning, Falk & Fecht, Falko, 2012. "Relationship lending in the interbank market and the price of liquidity," Discussion Papers 22/2012, Deutsche Bundesbank, Research Centre.
  4. Itai Agur, 2014. "Bank Risk Within and Across Equilibria," IMF Working Papers 14/116, International Monetary Fund.
  5. Horvath, Roman & Petrovski, Dragan, 2013. "International stock market integration: Central and South Eastern Europe compared," Economic Systems, Elsevier, vol. 37(1), pages 81-91.
  6. Horst Gischer & Toni Richter, 2011. "'Global Player' im Bankenwesen - ökonomisch sinnvoll oder problembehaftet?," FEMM Working Papers 110012, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.

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