Does bank integration contribute to insolvencies and crises?

Yanfei Sun and Yinan Ni

Journal of Financial Economic Policy, 2020, vol. 13, issue 1, 62-93

Abstract: Purpose - This paper aims to construct a measure of integration among global banks and examine its impact on bank insolvencies and bank crises. Design/methodology/approach - The authors apply principal component analysis to measure a bank’s degree of integration to the global banking market. Moreover, they test whether bank integration affects bank insolvency risk, in which they treat the equity of individual banks as a call option. Findings - The authors find that the banking industry has become more globally integrated over the past two decades. At the individual bank level, results indicate that banks with higher integration levels have more assets, more nontraditional banking services and more interbank businesses. Overall, they find that a bank’s integration level is negatively associated with insolvency risk, which suggests that greater integration with global markets diversifies a bank’s risk. At the country level, banking systems with less integrated big banks, or more integrated smaller banks, are more stable and hence less likely to suffer a banking crisis. Originality/value - The authors construct a novel measure of integration among global banks and examine its impact on bank insolvencies and bank crises.

Keywords: Bank integration; Crisis; Insolvency risk; Principle components analysis; Granger causality; Black-Scholes model; Banks; Government policy and regulation; International finance; F3; G21; G28 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:jfep-01-2020-0020

DOI: 10.1108/JFEP-01-2020-0020

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