IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Does financial integration make banks act more prudential? Regulation, foreign owned banks, and the lender-of-last resort

  • Berger, Helge
  • Hefeker, Carsten

We develop a simple model that looks at the incentives of private banks to behave prudentially and undertake costly efforts to lower the probability of bankruptcy or having to be bailed out by a lender of last resort. Government regulators can force banks to increase efforts beyond the privately optimal level. We contrast the national case under autarky with the case of an integrated banking market with bank cross-holdings. Because banks will exert a greater overall effort to monitor their foreign activities, financial integration might lead to more rather than less prudential behavior. Neither needs financial integration lead to a regulatory race to the bottom. We use the framework to investigate the impact of regulatory coordination on bank efforts and discuss incentives for banks to organize their foreign holdings in the form or branches or subsidiaries. We show that the absence of a common lender of last resort can reduce the probability of a financial crisis.

If 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.

File URL:
Download Restriction: no

Paper provided by Free University Berlin, School of Business & Economics in its series Discussion Papers with number 2006/2.

in new window

Date of creation: 2006
Date of revision:
Handle: RePEc:zbw:fubsbe:20062
Contact details of provider: Postal: Garystr. 21, 14195 Berlin (Dahlem)
Phone: (030) 838 2272
Fax: (030) 838 2129
Web page:

More information through EDIRC

References listed on IDEAS
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.:

as in new window
  1. Haizhou Huang & Charles Goodhart, 1999. "A Model of the Lender of Last Resort," FMG Discussion Papers dp313, Financial Markets Group.
  2. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  3. Repullo, Rafael, 2000. "A Model of Takeovers of Foreign Banks," CEPR Discussion Papers 2639, C.E.P.R. Discussion Papers.
  4. Calzolari, Giacomo & Loranth, Gyongyi, 2011. "Regulation of multinational banks: A theoretical inquiry," Journal of Financial Intermediation, Elsevier, vol. 20(2), pages 178-198, April.
  5. Eduardo Levy Yeyati & Tito Cordella, 2004. "Country Insurance," IMF Working Papers 04/148, International Monetary Fund.
  6. Prati, A. & Schinasi, G.J., 1999. "Financial Stability in European Economic and Monetary Union," Princeton Studies in International Economics 86, International Economics Section, Departement of Economics Princeton University,.
  7. Sander Osterloo & Dirk Schoenmaker, 2004. "Financial Supervision in an Integrating Europe: Measuring Cross-Border Externalities," FMG Special Papers sp156, Financial Markets Group.
  8. Ceyla Pazarbasioglu & Gudrun Johnsen & Paul Louis Ceriel Hilbers & Inci Ötker, 2005. "Assessing and Managing Rapid Credit Growth and the Role of Supervisory and Prudential Policies," IMF Working Papers 05/151, International Monetary Fund.
  9. De Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic risk: A survey," Working Paper Series 0035, European Central Bank.
  10. Holthausen, Cornelia & Rønde, Thomas, 2005. "Cooperation in International Banking Supervision," CEPR Discussion Papers 4990, C.E.P.R. Discussion Papers.
  11. Freixas, Xavier & Parigi, Bruno M. & Rochet, Jean-Charles, 2003. "The lender of last resort: a 21st century approach," Working Paper Series 0298, European Central Bank.
  12. Haizhou Huang & C. A. E. Goodhart, 2000. "A Simple Model of An International Lender of Last Resort," IMF Working Papers 00/75, International Monetary Fund.
  13. Thordur Olafsson & Julia Majaha-Jartby, 2005. "Regional Financial Conglomerates: A Case for Improved Supervision," IMF Working Papers 05/124, International Monetary Fund.
  14. 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.
  15. Xavier Vives, 2001. "Restructuring Financial Regulation in the European Monetary Union," Journal of Financial Services Research, Springer, vol. 19(1), pages 57-82, February.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:zbw:fubsbe:20062. See general information about how to correct material in RePEc.

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 you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.