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Economic Integration and Financial Stability; A European Perspective

  • Gianni De Nicoló
  • Alexander F. Tieman

This paper assesses changes in synchronization of real activity and financial market integration in Western Europe and evaluates their implications for financial stability. We find increased synchronization of real activity since the early 1980s and increased equity markets integration since the early 1990s. We also find that measures of systemic risk at large European financial institutions have not declined during the period 1990-2004 and that bank systemic risk profiles have converged. At the same time, the sensitivity of bank and insurance systemic risk measures to common real and financial shocks has increased in most countries. Overall, these results suggest that the integration process does not necessarily entail an unambiguously positive effect on financial stability.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/296.

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Length: 28
Date of creation: 01 Dec 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/296
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  1. Robin L. Lumsdaine & Eswar Prasad, 1999. "Identifying the Common Component in International Economic Fluctuations; A New Approach," IMF Working Papers 99/154, International Monetary Fund.
  2. Marshall, David A., 2005. "Comment on: "Estimating the expected marginal rate of substitution"," Journal of Monetary Economics, Elsevier, vol. 52(5), pages 971-979, July.
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  4. Philipp Hartmann & Stefan Straetmans & Casper de Vries, 2007. "Banking System Stability. A Cross-Atlantic Perspective," NBER Chapters, in: The Risks of Financial Institutions, pages 133-192 National Bureau of Economic Research, Inc.
  5. Reint Gropp & Jukka Vesala & Giuseppe Vulpes, 2002. "Equity and bond market signals as leading indicators of bank fragility," Conference Series ; [Proceedings], Federal Reserve Bank of Boston.
  6. Nikola A. Tarashev, 2005. "An empirical evaluation of structural credit risk models," BIS Working Papers 179, Bank for International Settlements.
  7. Kevin J. Stiroh, 2002. "Diversification in banking: is noninterest income the answer?," Staff Reports 154, Federal Reserve Bank of New York.
  8. Lieven Baele & Annalisa Ferrando & Peter Hördahl & Elizaveta Krylova & Cyril Monnet, 2004. "Measuring financial integration in the euro area," Occasional Paper Series 14, European Central Bank.
  9. Flood, Robert P. & Rose, Andrew K., 2005. "Estimating the expected marginal rate of substitution: A systematic exploitation of idiosyncratic risk," Journal of Monetary Economics, Elsevier, vol. 52(5), pages 951-969, July.
  10. James H. Stock & Mark W. Watson, 2005. "Understanding Changes In International Business Cycle Dynamics," Journal of the European Economic Association, MIT Press, vol. 3(5), pages 968-1006, 09.
  11. Ayhan Kose, M. & Otrok, Christopher & Whiteman, Charles H., 2008. "Understanding the evolution of world business cycles," Journal of International Economics, Elsevier, vol. 75(1), pages 110-130, May.
  12. Kpate Adjaouté, 2004. "Equity Returns and Integration: Is Europe Changing?," Oxford Review of Economic Policy, Oxford University Press, vol. 20(4), pages 555-570, Winter.
  13. Stiroh, Kevin J. & Rumble, Adrienne, 2006. "The dark side of diversification: The case of US financial holding companies," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2131-2161, August.
  14. Kpate ADJAOUTE & Jean-Pierre DANTHINE, 2004. "Equity Returns and Integration: Is Europe Changing?," FAME Research Paper Series rp117, International Center for Financial Asset Management and Engineering.
  15. Joel F. Houston & Kevin J. Stiroh, 2006. "Three decades of financial sector risk," Staff Reports 248, Federal Reserve Bank of New York.
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