Limits to International Banking Consolidation

44 Pages Posted: 28 Feb 2007

See all articles by Falko Fecht

Falko Fecht

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)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2006

Abstract

Heterogenous banking supervision and regulation is often considered as the most important impediment for Pan-European Bank mergers. In this paper we identify other more fundamental reasons for a limited degree of cross-country integration in retail banking. We argue that the distribution of regional liquidity shocks may pose a natural limit to the extent of cross-border bank mergers. The paper derives the impact of different underlying stochastic structures on the optimal structure of cross regional bank mergers. Imposing a symmetry restriction on the underlying stochastic structure of liquidity shocks we find that benefits from diversification and the costs of contagion may be optimally traded off if banks from some but not from all regions merge. Under an additional monotonicity assumption full integration is only desirable if the number of regions with diverse risks is sufficiently large.

Keywords: Bank Mergers, Financial Integration, Liquidity Transformation, Liquidity Crisis, Risk Sharing

JEL Classification: D61, E44, G21

Suggested Citation

Fecht, Falko and Grüner, Hans Peter, Limits to International Banking Consolidation (December 2006). Available at SSRN: https://ssrn.com/abstract=966048 or http://dx.doi.org/10.2139/ssrn.966048

Falko Fecht (Contact Author)

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

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