A Theory of the Boundaries of Banks with Implications for Financial Integration and Regulation

Falko Fecht, Roman Inderst and Sebastian Pfeil

No 16880, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We offer a theory of the "boundary of the firm" tailored to banks as it builds on a single risk-shifting inefficiency and takes into account interbank lending, as an alternative to integration, and insured deposit financing. It explains why deeper economic integration should cause also greater, though still incomplete, financial integration, through both bank mergers and interbank lending, and why economic disintegration, as currently witnessed in the European Union, should cause less interbank exposure. Recent policy measures such as the preferential treatment of retail deposits, the extension of deposit insurance, or penalties on "connectedness" could reduce welfare.

Keywords: Interbank lending; Risk shifting; Debt overhang; Integration; Deposit insurance (search for similar items in EconPapers)
JEL-codes: F36 G21 L25 (search for similar items in EconPapers)
Date: 2022-01
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Working Paper: A theory of the boundaries of banks with implications for financial integration and regulation (2015)
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