Financial Integration, Specialization, and Systemic Risk

25 Pages Posted: 6 Mar 2007

See all articles by Falko Fecht

Falko Fecht

Deutsche Bundesbank; Frankfurt School of Finance & Management

H. P. Gruner

University of Mannheim - Department of Economics; Institute for the Study of Labor (IZA); Centre for Economic Policy Research (CEPR)

Philipp Hartmann

European Central Bank (ECB); Centre for Economic Policy Research (CEPR) - International Macroeconomics

Multiple version iconThere are 4 versions of this paper

Date Written: February 2007

Abstract

This paper studies the stability implications of the cross-border integration of interbank markets. Integration enhances the diversification options of banks across borders and improves the resilience of the banking sector to idiosyncratic shocks. At the same time integration also increases the risk of contagion across borders given aggregate asymmetric shocks: A default of one bank due to a severe regional shock is transmitted over an integrated interbank market to banks across borders and might ultimately destabilize banks that were initially not affect be the regional shock. When analyzing this trade-off this paper takes into account that improved diversification options of idiosyncratic risks affect banks investment decisions leading to more specialization in lending. Apparently, the greater the specialization the larger is the need for risk sharing and the more reliant are regional financial institutions on the integrated financial market. Thus due to financial integration the exposure to other regions rises and increases the systemic risk.

Keywords: Financial integration, interbank market, specialization, financial contagion

JEL Classification: D61, E44, G21

Suggested Citation

Fecht, Falko and Grüner, Hans Peter and Hartmann, Philipp, Financial Integration, Specialization, and Systemic Risk (February 2007). Available at SSRN: https://ssrn.com/abstract=966039 or http://dx.doi.org/10.2139/ssrn.966039

Falko Fecht

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany
+4969956632312 (Phone)

HOME PAGE: http://https://www.bundesbank.de/en/falko-fecht

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Hans Peter Grüner

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Philipp Hartmann (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
(49 69) 1344 7356 (Phone)
(49 69) 1344 8553 (Fax)

Centre for Economic Policy Research (CEPR) - International Macroeconomics

London
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
387
Abstract Views
3,357
Rank
84,213
PlumX Metrics