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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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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. Itai Agur, 2014. "Bank Risk Within and Across Equilibria," IMF Working Papers 14/116, International Monetary Fund.
  2. Gurnain Kaur Pasricha, 2010. "Bank Competition and International Financial Integration: Evidence Using a New Index," Working Papers 10-35, Bank of Canada.
  3. 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.
  4. Horvath, Roman & Petrovski, Dragan, 2013. "International stock market integration: Central and South Eastern Europe compared," Economic Systems, Elsevier, vol. 37(1), pages 81-91.
  5. Kerstin Gerling, 2008. "The Real Consequences of Financial Market Integration when Countries Are Heterogeneous," Working Papers 141, Oesterreichische Nationalbank (Austrian Central Bank).
  6. Bräuning, Falk & Fecht, Falko, 2012. "Relationship lending in the interbank market and the price of liquidity," Discussion Papers 22/2012, Deutsche Bundesbank, Research Centre.

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