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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

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8854.

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Date of creation: Feb 2012
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Handle: RePEc:cpr:ceprdp:8854

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Keywords: financial contagion; Financial integration; interbank market; risk sharing; specialization;

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Citations

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Cited by:
  1. Roman Horvath & Dragan Petrovski, 2012. "International Stock Market Integration: Central and South Eastern Europe Compared," William Davidson Institute Working Papers Series wp1028, William Davidson Institute at the University of Michigan.
  2. Gurnain Kaur Pasricha, 2010. "Bank Competition and International Financial Integration: Evidence Using a New Index," Working Papers 10-35, Bank of Canada.
  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. 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.
  5. Gerling, Kerstin, 2008. "The Real Consequences of Financial Market Integration when Countries Are Heterogeneous," Working Papers 141, Oesterreichische Nationalbank (Austrian Central Bank).

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