A Theory of the Boundaries of Banks with Implications for Financial Integration and Regulation

Posted: 20 Apr 2018

See all articles by Falko Fecht

Falko Fecht

Frankfurt School of Finance & Management

Roman Inderst

Goethe University Frankfurt

Sebastian Pfeil

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Erasmus Research Institute of Management (ERIM)

Date Written: September 2017

Abstract

We offer a theory of the "boundary of the firm" tailored to banks as it builds on a single risk-shifting inefficiency and takes into account interbank lending, as an alternative to integration, and insured deposit financing. It explains why deeper economic integration should cause also greater, though still incomplete, financial integration, through both bank mergers and interbank lending, and why economic disintegration, as currently witnessed in the European Union, should cause less interbank exposure. Recent policy measures such as the preferential treatment of retail deposits, the extension of deposit insurance, or penalties on "connectedness" could reduce welfare.

Keywords: Interbank Lending, Risk Shifting, Debt Overhang, Integration

JEL Classification: G21, F36

Suggested Citation

Fecht, Falko and Inderst, Roman and Pfeil, Sebastian, A Theory of the Boundaries of Banks with Implications for Financial Integration and Regulation (September 2017). Available at SSRN: https://ssrn.com/abstract=3164465

Falko Fecht

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Roman Inderst

Goethe University Frankfurt ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60629
Germany
+49 (69) 798-34601 (Phone)
+49 (69) 798-35000 (Fax)

HOME PAGE: http://www.wiwi.uni-frankfurt.de/en/departments/finance/lehrstuhl/prof-dr-roman-inderst/team

Sebastian Pfeil (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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