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Welfare effects of financial integration Author info | Abstract | Publisher info | Download info | Related research | Statistics Fecht, Falko
Grüner, Hans Peter
Hartmann, Philipp
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This 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.
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Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 2: Banking and Financial Studies with number
2007,11.
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Date of creation: 2007Date of revision:
Handle: RePEc:zbw:bubdp2:6154Contact details of provider: Postal: Postfach 10 06 02, 60006 Frankfurt Phone: 0 69 / 95 66 - 34 55 Fax: 0 69 / 95 66 30 77 Email: Web page: http://www.bundesbank.de/ More information through EDIRC
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Keywords: Financial integration interbank market cross border lending financial contagion Other versions of this item:
Find related papers by JEL classification: D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data) G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
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