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The effects of global bank competition and presence on local economies: The Goldilocks principle may not apply to global banking

Uluc Aysun

Economic Modelling, 2018, vol. 70, issue C, 159-173

Abstract: This paper is the first to show that advanced economies are least stable when the market power of global banks in these economies are neither too high nor too low. When global banks have higher/lower market power in one economy than the others, they don't shift funds across countries by as much in response to shocks, and the economies become more stable with robust lending. The reason is that increasing (decreasing) loans causes a sharper decrease (increase) in global banks' returns in the economy where they have high market power. It is at moderate levels of market power at which global banks (unlike domestic banks that only lend locally) substantially reallocate funds across countries and generate high volatility. This finding, unlike the usual unidirectional relationships in the literature, implies that countries should either allow few large global banks to dominate their credit markets or minimize their exposure to global banking. The middle ground, the Goldilocks region, is turbulent.

Keywords: Global banks; Cournot competition; Real business cycles; Advanced economies (search for similar items in EconPapers)
JEL-codes: E32 E44 F33 F44 (search for similar items in EconPapers)
Date: 2018
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