The Internationalization of American Banking and Finance: Structure, Risk, Adn World Interest Rates

Abstract

The transformation of American banking from the parochialism of 1960to the internationally linked structure of the 1980s is analyzed anddetailed quantitatively. While the liberalization of trade and theexistence of and changes in financial regulations profoundly affected thepace and order of this transformation, it is argued that internationalbanking is the historic norm. International banking on the one handprovides the opportunity to banks to diversify their portfolio, but maysimultaneously expose them to increased systematic risk, especially withregards to movements in the U.S. real interest rate. Deposit insuranceprovides an incentive for banks to take on such priced systematic riskwith welfare costs which must be balanced against the welfare gains fromthe insurance. The paper closes with an exploration of the nature of thelinkage of major movements in real interest rates and exchange rates.Further research seems warranted on monetary-policy-regime changes andinvestment-demand shifts as a result of changes in tax, regulatory, andpolitical climate.