Bulletin n. 2-3/2012 | ||
October 2012-February 2013 | ||
Fecht Falko, Grüner Hans Peter, Hartmann Philipp |
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Financial integration, specialization, and systemic risk | ||
in Journal of International Economics , Volume 88, Issue 1, September 2012 , 2012 , Pages 150-161 | ||
This paper studies the implications of cross-border financial integration for financial stability when banks' loan portfolios adjust endogenously. Banks can be subject to sectoral and aggregate domestic shocks. After integration they can share these risks in a complete interbank market. When banks have a comparative advantage in providing credit to certain industries, financial integration may induce banks to specialize in lending. An enhanced concentration in lending does not necessarily increase risk, because a well-functioning interbank market allows to achieve the necessary diversification. This greater need for risk sharing, though, increases the risk of cross-border contagion and the likelihood of widespread banking crises. However, even though integration increases the risk of contagion it improves welfare if it permits banks to realize specialization benefits. | ||