Financial Integration, Specialization, and Systemic Risk
Author | : Falko Fecht |
Publisher | : |
Total Pages | : 0 |
Release | : 2012 |
ISBN-10 | : OCLC:784394043 |
ISBN-13 | : |
Rating | : 4/5 (43 Downloads) |
Download or read book Financial Integration, Specialization, and Systemic Risk written by Falko Fecht and published by . This book was released on 2012 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.