Financial integration, specialization, and systemic risk

Falko Fecht, Hans Peter Grüner and Philipp Hartmann

Journal of International Economics, 2012, vol. 88, issue 1, 150-161

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 integration; Specialization; Interbank market; Financial contagion (search for similar items in EconPapers)
JEL-codes: D61 E44 G21 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (24)

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Related works:
Working Paper: 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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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:88:y:2012:i:1:p:150-161

DOI: 10.1016/j.jinteco.2012.01.012

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