Does Financial Integration Make Banks Act More Prudential? Regulation, Foreign Owned Banks, and the Lender-of-Last Resort
HWWA Institute of International Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Free University Berlin - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
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.
Number of Pages in PDF File: 45
Keywords: Bank regulation, lender of last resort, European financial markets
JEL Classification: E42, E58, E61, F33, F36working papers series
Date posted: April 5, 2006
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