Bank Fragility and International Capital Mobility
IMF Working Paper No. 99/113
Posted: 4 Jan 2000
Date Written: August 1999
The paper studies the effects of increased international financial integration when banks are fragile, with a focus on the welfare of bank depositors and of the business sector. A simple model of a small open economy with a fragile banking sector and imperfect capital mobility is developed. Increased international integration of the bank deposit market makes fundamental-driven bank runs more likely. The business sector is unambiguously worse off, while bank depositors may lose or gain depending on the parameters. Even if depositors gain, the overall effect on the economy may be negative if net holdings of foreign assets are small relative to the deadweight costs of banking crises.
JEL Classification: F36, F41, G21
Suggested Citation: Suggested Citation