Welfare effects of financial integration
AbstractThis paper compares four forms of inter-regional financial risk sharing: (i) segmentation, (ii) integration trough the secured interbank market, (iii) integration trough the unsecured interbank market, (iv) integration of retail markets. The secured interbank market is an optimal risk-sharing device when banks report liquidity needs truthfully. It allows diversification without the risk of cross-regional financial contagion. However, free-riding on the liquidity provision in this market restrains the achievable risk-sharing as the number of integrated regions increases. In too large an area this moral hazard problem becomes so severe that either unsecured interbank lending or, ultimately, the penetration of retail markets is preferable. Even though this deeper financial integration entails the risk of contagion it may be beneficial for large economic areas, because it can implement an efficient sharing of idiosyncratic regional shocks. Therefore, the enlargement of a monetary union, for example, extending the common interbank market might increase the benefits of also integrating retail banking markets through cross-border transactions or bank mergers. --
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 2: Banking and Financial Studies with number 2007,11.
Date of creation: 2007
Date of revision:
Financial integration; interbank market; cross border lending; financial contagion;
Other versions of this item:
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-10-20 (All new papers)
- NEP-BAN-2007-10-20 (Banking)
- NEP-MAC-2007-10-20 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Carletti, Elena & Hartmann, Philipp & Spagnolo, Giancarlo, 2005.
"Bank Mergers, Competition and Liquidity,"
Working Paper Series
182, Sveriges Riksbank (Central Bank of Sweden).
- Elena Carletti & Philipp Hartmann & Giancarlo Spagnolo, 2007. "Bank Mergers, Competition, and Liquidity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(5), pages 1067-1105, 08.
- Elena Carletti & Philipp Hartman & Giancarlo Spagnolo, 2003. "Bank mergers, competition, and liquidity," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 89-99.
- Carletti, Elena & Hartmann, Philipp & Spagnolo, Giancarlo, 2004. "Bank Mergers, Competition and Liquidity," CEPR Discussion Papers 4260, C.E.P.R. Discussion Papers.
- Elena Carletti & Philipp Hartmann & Giancarlo Spagnolo, 2003. "Bank mergers, competition and liquidity," Working Paper Series 292, European Central Bank.
- Xavier Freixas & Bruno M. Parigi & Jean-Charles Rochet, 2000.
"Systemic risk, interbank relations, and liquidity provision by the central bank,"
Federal Reserve Bank of Cleveland, pages 611-640.
- Freixas, Xavier & Parigi, Bruno M & Rochet, Jean-Charles, 2000. "Systemic Risk, Interbank Relations, and Liquidity Provision by the Central Bank," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 611-38, August.
- Freixas, Xavier & Parigi, Bruno & Rochet, Jean Charles, 1999. "Systemic Risk, Interbank Relations and Liquidity Provision by the Central Bank," CEPR Discussion Papers 2325, C.E.P.R. Discussion Papers.
- Xavier Freixas & Bruno Parigi & Jean Charles Rochet, 1998. "Systemic risk, interbank relations and liquidity provision by the Central Bank," Economics Working Papers 440, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 1999.
- X. Freixas & B. Parigi & J-C. Rochet, 2000. "Systemic Risk, Interbank Relations and Liquidity Provision by theCentral Bank," DNB Staff Reports (discontinued) 47, Netherlands Central Bank.
- Rene M. Stulz, 2005.
"The Limits of Financial Globalization,"
NBER Working Papers
11070, National Bureau of Economic Research, Inc.
- Allen, Franklin & Gale, Douglas, 1998.
98-33, C.V. Starr Center for Applied Economics, New York University.
- Yaron Leitner, 2005. "Financial Networks: Contagion, Commitment, and Private Sector Bailouts," Journal of Finance, American Finance Association, vol. 60(6), pages 2925-2953, December.
- Douglas W. Diamond & Raghuram G. Rajan, 2003.
"Liquidity Shortages and Banking Crises,"
NBER Working Papers
10071, National Bureau of Economic Research, Inc.
- Xavier Freixas & Cornelia Holthausen, 2001.
"Interbank market integration under asymmetric information,"
Economics Working Papers
579, Department of Economics and Business, Universitat Pompeu Fabra.
- Xavier Freixas, 2005. "Interbank Market Integration under Asymmetric Information," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 459-490.
- Freixas, X. & Holthausen, C., 2001. "Interbank Market Integration under Asymmetric Information," Papers 74, Quebec a Montreal - Recherche en gestion.
- Cornelia Holthausen & Xavier Freixas, 2001. "Interbank market integration under asymmetric information," Working Paper Series 074, European Central Bank.
- Rochet, Jean-Charles & Tirole, Jean, 1996.
"Interbank Lending and Systemic Risk,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 28(4), pages 733-62, November.
- Bhattacharya, Sudipto & Fulghieri, Paolo, 1994. "Uncertain liquidity and interbank contracting," Economics Letters, Elsevier, vol. 44(3), pages 287-294.
- Hans Degryse & Steven Ongena, 2004.
"The Impact of Technology and Regulation on the Geographical Scope of Banking,"
Center for Economic Studies - Discussion papers
ces0408, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
- Hans Degryse, 2004. "The Impact of Technology and Regulation on the Geographical Scope of Banking," Oxford Review of Economic Policy, Oxford University Press, vol. 20(4), pages 571-590, Winter.
- Degryse, Hans & Ongena, S, 2004. "The impact of technology and regulation on the geographical scope of banking," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/101171, Katholieke Universiteit Leuven.
- Jith Jayaratne & Philip E. Strahan, 1997. "The benefits of branching deregulation," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 13-29.
- Mutu, Simona & Breşfelean, Vasile Paul & Göndör, Mihaela, 2011. "The impact of the financial crisis on the interbank money markets behavior. Evidence from several CEE transition economies," MPRA Paper 42102, University Library of Munich, Germany.
- Steven Ongena & Alexander Popov, 2010.
"Interbank market integration, loan rates, and firm leverage,"
Working Paper Series
1252, European Central Bank.
- Popov, Alexander & Ongena, Steven, 2011. "Interbank market integration, loan rates, and firm leverage," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 544-559, March.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics).
If references are entirely missing, you can add them using this form.