Does Financial Integration Make Banks Act More Prudential? Regulation, Foreign Owned Banks, and the Lender-of-Last Resort

Helge Berger () and Carsten Hefeker

No 339, HWWA Discussion Papers from Hamburg Institute of International Economics (HWWA)

Abstract: We analyze whether financial integration will lead to lower national regulation of domestic banking activities. In our model, banks' efforts and public regulation can lower the probability of bankruptcy. We contrast the national case with an integrated banking market and find that banks will exert greater effort to monitor their foreign activities. Thus, financial integration may increase prudential behavior and regulation. We also discuss incentives for banks to organize their foreign holdings in branches or subsidiaries. We show that the absence of a common lender of last resort can reduce the probability of financial crisis.

Keywords: Bank regulation; lender of last resort; European financial markets (search for similar items in EconPapers)
JEL-codes: E42 E58 E61 F33 F36 (search for similar items in EconPapers)
Date: 2006
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Working Paper: Does financial integration make banks act more prudential? Regulation, foreign owned banks, and the lender-of-last resort (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:hwwadp:339

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