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A Theory of the Boundaries of Banks with Implications for Financial Integration and Regulation

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  • Inderst, Roman
  • Fecht, Falko
  • ,

Abstract

We offer a theory of the "boundary of the firm" tailored to banks as it builds on a single risk-shifting inefficiency and takes into account interbank lending, as an alternative to integration, and insured deposit financing. It explains why deeper economic integration should cause also greater, though still incomplete, financial integration, through both bank mergers and interbank lending, and why economic disintegration, as currently witnessed in the European Union, should cause less interbank exposure. Recent policy measures such as the preferential treatment of retail deposits, the extension of deposit insurance, or penalties on "connectedness" could reduce welfare.

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  • Inderst, Roman & Fecht, Falko & ,, 2022. "A Theory of the Boundaries of Banks with Implications for Financial Integration and Regulation," CEPR Discussion Papers 16880, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16880
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    Cited by:

    1. John B. Taylor & Volker Wieland, 2016. "Finding the Equilibrium Real Interest Rate in a Fog of Policy Deviations," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 51(3), pages 147-154, July.
    2. Ding, Haina & Guembel, Alexander & Ozanne, Alessio, 2020. "Market Information in Banking Supervision: The Role of Stress Test Design," TSE Working Papers 20-1144, Toulouse School of Economics (TSE).

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    More about this item

    Keywords

    Interbank lending; Risk shifting; Debt overhang; Integration; Deposit insurance;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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