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Limits to International Banking Consolidation

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  • Falko Fecht

    ()

  • Hans Grüner

Abstract

Heterogenous banking supervision and regulation is often considered as the most important impediment for Pan-European Bank mergers. In this paper we identify other more fundamental reasons for a limited degree of cross-country integration in retail banking. We argue that the distribution of regional liquidity shocks may pose a natural limit to the extent of cross-border bank mergers. The paper derives the impact of different underlying stochastic structures on the optimal structure of cross regional bank mergers. Imposing a symmetry restriction on the underlying stochastic structure of liquidity shocks we find that benefits from diversification and the costs of contagion may be optimally traded off if banks from some but not from all regions merge. Under an additional monotonicity assumption full integration is only desirable if the number of regions with diverse risks is sufficiently large. --

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File URL: http://hdl.handle.net/10.1007/s11079-007-9060-6
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 19 (2008)
Issue (Month): 5 (November)
Pages: 651-666

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Handle: RePEc:kap:openec:v:19:y:2008:i:5:p:651-666

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: Bank mergers; Financial integration; Liquidity transformation; Liquidity crisis; Risk sharing; D61; E44; G21;

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References

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  1. Hashem Pesaran & Davide Pettenuzzo & Allan Timmermann, 2006. "Learning, Structural Instability and Present Value Calculations," IEPR Working Papers 06.42, Institute of Economic Policy Research (IEPR).
  2. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  3. Falko Fecht & Kevin X. D. Huang & Antoine Martin, 2008. "Financial Intermediaries, Markets, and Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(4), pages 701-720, 06.
  4. Freixas, Xavier & Parigi, Bruno M & Rochet, Jean-Charles, 2000. "Systemic Risk, Interbank Relations, and Liquidity Provision by the Central Bank," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 611-38, August.
  5. Fecht, Falko & Grüner, Hans Peter, 2005. "Financial integration and systemic risk," Discussion Paper Series 2: Banking and Financial Studies 2005,11, Deutsche Bundesbank, Research Centre.
  6. John Y. Campbell & Jens Hilscher & Jan Szilagyi, 2006. "In Search of Distress Risk," NBER Working Papers 12362, National Bureau of Economic Research, Inc.
  7. Koetter, Michael & Bos, Jaap W. B. & Heid, Frank & Kool, Clemens J. M. & Kolari, James W. & Porath, Daniel, 2005. "Accounting for distress in bank mergers," Discussion Paper Series 2: Banking and Financial Studies 2005,09, Deutsche Bundesbank, Research Centre.
  8. von Kalckreuth, Ulf, 2005. "A "wreckers theory" of financial distress," Discussion Paper Series 1: Economic Studies 2005,40, Deutsche Bundesbank, Research Centre.
  9. Anil K. Kashyap & Raghuram Rajan & Jeremy C. Stein, 1999. "Banks as Liquidity Providers: An Explanation for the Co-Existence of Lending and Deposit-Taking," NBER Working Papers 6962, National Bureau of Economic Research, Inc.
  10. Slacalek, Jirka & Fritsche, Ulrich & Dovern, Jonas & Döpke, Jörg, 2005. "European inflation expectations dynamics," Discussion Paper Series 1: Economic Studies 2005,37, Deutsche Bundesbank, Research Centre.
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Cited by:
  1. 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.
  2. Robert DeYoung & Douglas Evanoff & Philip Molyneux, 2009. "Mergers and Acquisitions of Financial Institutions: A Review of the Post-2000 Literature," Journal of Financial Services Research, Springer, vol. 36(2), pages 87-110, December.
  3. Diemo Dietrich & Tobias Knedlik & Axel Lindner, 2011. "Central and Eastern European countries in the global financial crisis: a typical twin crisis?," Post-Communist Economies, Taylor & Francis Journals, vol. 23(4), pages 415-432, April.

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