Financial Integration, Specialization, and Systemic Risk

Philipp Hartmann, Falko Fecht and Grüner, Hans Peter

No 8854, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Financial contagion; Financial integration; Interbank market; Risk sharing; Specialization (search for similar items in EconPapers)
JEL-codes: D61 E44 G21 (search for similar items in EconPapers)
Date: 2012-02
New Economics Papers: this item is included in nep-ban and nep-cba
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Citations: View citations in EconPapers (29)

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Related works:
Journal Article: Financial integration, specialization, and systemic risk (2012)
Working Paper: Financial integration, specialization and systemic risk (2012)
Working Paper: Financial integration, specialization and systemic risk (2008)
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