Financial Integration and Liquidity Crises

Fabio Castiglionesi (), Fabio Feriozzi and Guido Lorenzoni ()

No 23359, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The paper analyzes the effects of financial integration on the stability of the banking system. Financial integration allows banks in different regions to smooth local liquidity shocks by borrowing and lending on a world interbank market. We show under which conditions financial integration induces banks to reduce their liquidity holdings and to shift their portfolios towards more profitable but less liquid investments. Integration helps reallocate liquidity when different banks are hit by uncorrelated shocks. However, when a correlated (systemic) shock hits, the total liquid resources in the banking system are lower than in autarky. Therefore, financial integration leads to more stable interbank interest rates in normal times, but to larger interest rate spikes in crises. These results hold in a setup where financial integration is welfare improving from an ex ante point of view. We also look at the model's implications for financial regulation and show that, in a second-best world, financial integration can increase the welfare benefits of liquidity requirements.

JEL-codes: F36 G15 G21 (search for similar items in EconPapers)
Date: 2017-04
New Economics Papers: this item is included in nep-cba
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

Published as Fabio Castiglionesi & Fabio Feriozzi & Guido Lorenzoni, 2019. "Financial Integration and Liquidity Crises," Management Science, vol 65(3), pages 955-975.

Downloads: (external link)
http://www.nber.org/papers/w23359.pdf (application/pdf)

Related works:
Journal Article: Financial Integration and Liquidity Crises (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:23359

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w23359

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().