A theory of the boundaries of banks with implications for financial integration and regulation

Falko Fecht, Roman Inderst and Sebastian Pfeil

No 87, IMFS Working Paper Series from Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS)

Abstract: We offer a theory of the "boundary of the firm" that is tailored to banking, as it builds on a single inefficiency arising from risk-shifting and as it takes into account both interbank lending as an alternative to integration and the role of possibly insured deposit funding. Amongst others, it explains both why deeper economic integration should cause also greater financial integration through both bank mergers and interbank lending, albeit this typically remains inefficiently incomplete, and why economic disintegration (or "desychronization"), as currently witnessed in the European Union, should cause less interbank exposure. It also suggests that recent policy measures such as the preferential treatment of retail deposits, the extension of deposit insurance, or penalties on "connectedness" could all lead to substantial welfare losses.

Date: 2015
New Economics Papers: this item is included in nep-ban and nep-cba
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: A Theory of the Boundaries of Banks with Implications for Financial Integration and Regulation (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:imfswp:87

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