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Does Financial Integration Make Banks Act More Prudential? Regulation, Foreign Owned Banks, and the Lender-of-Last Resort

  • Berger, Helge
  • Hefeker, Carsten

We analyze whether financial integration will lead to lower national regulation of domestic banking activities. In our model, banks? efforts and public regulation can lower the probability of bankruptcy. We contrast the national case with an integrated banking market and find that banks will exert greater effort to monitor their foreign activities. Thus, financial integration may increase prudential behavior and regulation. We also discuss incentives for banks to organize their foreign holdings in branches or subsidiaries. We show that the absence of a common lender of last resort can reduce the probability of financial crisis.

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Paper provided by Hamburg Institute of International Economics (HWWA) in its series HWWA Discussion Papers with number 339.

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Date of creation: 2006
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Handle: RePEc:zbw:hwwadp:339
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  1. 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,.
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  5. Calzolari, Giacomo & Loranth, Gyongyi, 2011. "Regulation of multinational banks: A theoretical inquiry," Journal of Financial Intermediation, Elsevier, vol. 20(2), pages 178-198, April.
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  8. Haizhou Huang & Charles Goodhart, 1999. "A Simple Model of an International Lender of Last Resort," FMG Discussion Papers dp336, Financial Markets Group.
  9. Xavier Freixas & Bruno M. Parigi & Jean-Charles Rochet, 2003. "The lender of last resort: A 21st Century approach," Economics Working Papers 708, Department of Economics and Business, Universitat Pompeu Fabra.
  10. De Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic risk: A survey," Working Paper Series 0035, European Central Bank.
  11. Dirk Schoenmaker & Sander Oosterloo, 2005. "Financial Supervision in an Integrating Europe: Measuring Cross-Border Externalities," International Finance, Wiley Blackwell, vol. 8(1), pages 1-27, 07.
  12. 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.
  13. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  14. Thordur Olafsson & Julia Majaha-Jartby, 2005. "Regional Financial Conglomerates: A Case for Improved Supervision," IMF Working Papers 05/124, International Monetary Fund.
  15. Repullo, R., 2000. "A Model of Takeovers of Foreign Banks," Papers 0015, Centro de Estudios Monetarios Y Financieros-.
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