Financial integration, specialization and systemic risk

Arbeitspapier

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, they will exploit the enhanced risk sharing opportunities through more specialization in lending. The enhanced concentration in lending does not increase risk, because a well-functioning interbank market allows to achieve the necessary diversification. The greater need for risk sharing through it increases, however, the risk of cross-border contagion. Better risk sharing and greater risk of contagion tend to offset each other and financial integration improves welfare since specialization benefits are realized.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Discussion Paper Series 1 ; No. 2008,23

Classification and Topics

• Classification: Wirtschaft ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Allocative Efficiency; Cost-Benefit Analysis ; Financial Markets and the Macroeconomy
• Subject: Financial integration ; specialization ; interbank market ; financial contagion ; Internationaler Finanzmarkt ; Marktintegration ; Geldmarkt ; Kreditgeschäft ; Arbeitsteilung ; Ansteckungseffekt ; Finanzmarktkrise ; Theorie ; Welt ; risk sharing

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Fecht, Falko ; Grüner, Hans Peter ; Hartmann, Philipp
• Event: Veröffentlichung
• (who): Deutsche Bundesbank
• (where): Frankfurt a. M.
• (when): 2008

Further information

• Handle: http://hdl.handle.net/10419/27647
• Last update: 10.03.2025, 11:45 AM CET