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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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  • Fecht, Falko & Grüner, Hans Peter & Hartmann, Philipp, 2012. "Financial integration, specialization, and systemic risk," Journal of International Economics, Elsevier, vol. 88(1), pages 150-161.
  • Handle: RePEc:eee:inecon:v:88:y:2012:i:1:p:150-161 DOI: 10.1016/j.jinteco.2012.01.012
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    Cited by:

    1. Zaghini, Andrea, 2016. "Fragmentation and heterogeneity in the euro-area corporate bond market: Back to normal?," Journal of Financial Stability, Elsevier, pages 51-61.
    2. Philip Vermeulen, 2012. "Bank dependence and investment during the financial crisis," Research Bulletin, European Central Bank, vol. 17, pages 12-14.
    3. Kerstin Gerling, 2008. "The Real Consequences of Financial Market Integration when Countries Are Heterogeneous," Working Papers 141, Oesterreichische Nationalbank (Austrian Central Bank).
    4. Gurnain Kaur Pasricha, 2009. "Bank Competition and International Financial Integration: Evidence using a new index," FIW Working Paper series 037, FIW.
    5. repec:oup:revfin:v:21:y:2017:i:1:p:33-75. is not listed on IDEAS
    6. Cinzia Alcidi & Mathias Dolls & Clemens Fuest & Carla Krolage & Florian Neumeier, 2017. "The Nature of Shocks in the Eurozone and Their Absorption Channels," EconPol Policy Reports 3, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    7. Olga Gorbachev & María José Luengo-Prado, 2016. "The Credit Card Debt Puzzle: The Role of Preferences, Credit Risk, and Financial Literacy," Working Papers 16-06, University of Delaware, Department of Economics.
    8. 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.
    9. Mikhail Stolbov, 2017. "Assessing systemic risk and its determinants for advanced and major emerging economies: the case of ΔCoVaR," International Economics and Economic Policy, Springer, vol. 14(1), pages 119-152, January.
    10. Simone Manganelli, 2012. "The impact of the Securities Markets Programme," Research Bulletin, European Central Bank, vol. 17, pages 2-5.
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    12. Bartram, Söhnke M. & Wang, Yaw-Huei, 2015. "European financial market dependence: An industry analysis," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 146-163.
    13. Agur, Itai, 2014. "Bank risk within and across equilibria," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 322-333.
    14. Michal Andrle & Michael Kumhof & Douglas Laxton & Dirk V Muir, 2015. "Banks in The Global Integrated Monetary and Fiscal Model," IMF Working Papers 15/150, International Monetary Fund.
    15. Panetti, Ettore, 2014. "Financial liberalization and contagion with unobservable savings," International Review of Financial Analysis, Elsevier, vol. 36(C), pages 20-35.
    16. Janus, Paweł & Koopman, Siem Jan & Lucas, André, 2014. "Long memory dynamics for multivariate dependence under heavy tails," Journal of Empirical Finance, Elsevier, vol. 29(C), pages 187-206.
    17. Bernd Schwaab, 2012. "Conditional probabilities and contagion measures for euro area sovereign default risk," Research Bulletin, European Central Bank, vol. 17, pages 6-11.
    18. Falk Bräuning & Falko Fecht, 2017. "Relationship Lending in the Interbank Market and the Price of Liquidity," Review of Finance, European Finance Association, vol. 21(1), pages 33-75.
    19. Silva, Walmir & Kimura, Herbert & Sobreiro, Vinicius Amorim, 2017. "An analysis of the literature on systemic financial risk: A survey," Journal of Financial Stability, Elsevier, vol. 28(C), pages 91-114.

    More about this item

    Keywords

    Financial integration; Specialization; Interbank market; Financial contagion;

    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
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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