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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, they will exploit the enhanced risk sharing opportunities through more specialization in lending. The enhanced concentration in lending does not increase risk, because a well-functioning interbank market allows to achieve the necessary diversification. The greater need for risk sharing through it increases, however, the risk of cross-border contagion. Better risk sharing and greater risk of contagion tend to offset each other and financial integration improves welfare since specialization benefits are realized. --

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Bibliographic Info

Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2008,23.

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Date of creation: 2008
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Handle: RePEc:zbw:bubdp1:7562

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

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References

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Citations

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Cited by:
  1. Pasricha, Gurnain, 2009. "Bank Competition and International Financial Integration: Evidence using a new Index," MPRA Paper 16767, University Library of Munich, Germany.
  2. Gerling, Kerstin, 2008. "The Real Consequences of Financial Market Integration when Countries Are Heterogeneous," Working Papers 141, Oesterreichische Nationalbank (Austrian Central Bank).
  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. Roman Horvath & Dragan Petrovski, 2012. "International Stock Market Integration : Central and South Eastern Europe Compared," Working Papers 317, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies).
  5. 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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