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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. 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.
  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. Xavier Vives, 2001. "Restructuring Financial Regulation in the European Monetary Union," Journal of Financial Services Research, Springer, vol. 19(1), pages 57-82, February.
  4. Rafael Repullo, 2001. "A model of takeovers of foreign banks," Spanish Economic Review, Springer, vol. 3(1), pages 1-21.
  5. 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.
  6. de Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic Risk: A Survey," CEPR Discussion Papers 2634, C.E.P.R. Discussion Papers.
  7. Calzolari, Giacomo & Loranth, Gyongyi, 2005. "Regulation of multinational banks: a theoretical inquiry," Working Paper Series 0431, European Central Bank.
  8. Charles A. E. Goodhart & Haizhou Huang, 1999. "A model of the lender of last resort," Proceedings, Federal Reserve Bank of San Francisco.
  9. 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,.
  10. Holthausen, Cornelia & Rønde, Thomas, 2005. "Cooperation in International Banking Supervision," CEPR Discussion Papers 4990, C.E.P.R. Discussion Papers.
  11. 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.
  12. Haizhou Huang & Charles Goodhart, 1999. "A Simple Model of an International Lender of Last Resort," FMG Discussion Papers dp336, Financial Markets Group.
  13. Thordur Olafsson & Julia Majaha-Jartby, 2005. "Regional Financial Conglomerates; A Case for Improved Supervision," IMF Working Papers 05/124, International Monetary Fund.
  14. Tito Cordella & Eduardo Levy Yeyati, 2004. "Country Insurance," Econometric Society 2004 North American Summer Meetings 290, Econometric Society.
  15. 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.
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