Financial integration, specialization and systemic risk

Hans Peter Grüner, Philipp Hartmann and Falko Fecht

No 1425, Working Paper Series from European Central Bank

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. JEL Classification: D61, E44, G21

Keywords: Financial contagion; financial integration; interbank market; specialization (search for similar items in EconPapers)
Date: 2012-02
New Economics Papers: this item is included in nep-ban and nep-cba
Note: 229414
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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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