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http://hdl.handle.net/10419/19744
  
Title:Financial integration and systemic risk PDF Logo
Authors:Fecht, Falko
Grüner, Hans Peter
Issue Date:2005
Series/Report no.:Discussion Paper, Series 2: Banking and Financial Supervision 2005,11
Abstract:Recent empirical studies criticize the sluggish financial integration in the euro area and find that only interbank money markets are fully integrated so far. This paper studies the optimal regional and/or sectoral integration of financial systems given that integration is restricted to the interbank market. Based on Allen and Gale (2000)'s seminal analysis of financial contagion we derive the interbank market structure that maximizes consumers' ex-ante expected utility, i.e. that optimizes the trade-off between the contagion and the diversification effect. We analyze the impact of various structural parameters including the underlying stochastic structure on this trade-off. In addition we derive the efficient design of the interbank market that allows for a cross-regional risk sharing between banks. We also provide a measure for the efficiency losses that result if financial integration is limited to an integration of the interbank market.
Subjects:Interbank Market
Risk Sharing
Financial Contagion
Financial Integration
JEL:G21
G10
E44
D61
Document Type:Working Paper
Appears in Collections:Discussion Paper Series 2: Banking and Financial Studies, Deutsche Bundesbank

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