The Impact of Cross-Border Banking on Financial Stability
AbstractThis paper focuses on the stability aspects of cross-border banking. We first argue that cross-border banking brings about various benefits and costs for financial stability. Based on this, we draw conclusions for the desirability of cross-border banking in the EU, and derive implications for its optimal form. Next, we derive metrics that allow quantifying whether cross-border banking in a country (or region) takes a desirable form and apply these metrics to the EU countries. Our results suggest that the countries with the largest banking centers, UK and Germany, are well diversified. By contrast, the New Member States (NMS) are highly dependent on a few West-European banks and thus vulnerable to contagion effects. The Nordic and Baltic regions are also much interwoven without much diversification. At the system-wide level, the EU banking system is weakly diversified, with an overexposure to the US and an underexposure to Japan and China. This explains why the recent US originated financial crisis had such a large impact on European banks.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 11-054/2/DSF18.
Date of creation: 17 Mar 2011
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International Banking; Portfolio Diversification; Financial Stability;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-04-02 (All new papers)
- NEP-BAN-2011-04-02 (Banking)
- NEP-CBA-2011-04-02 (Central Banking)
- NEP-EEC-2011-04-02 (European Economics)
- NEP-IFN-2011-04-02 (International Finance)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Cross-border banking and financial stability
by Economic Logician in Economic Logic on 2011-05-04 01:54:00
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