Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153858
Year of Publication: 
2012
Series/Report no.: 
ECB Working Paper No. 1425
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
This paper studies the implications of cross-border financial integration for financial stability when banks' loan portfolios adjust endogenously. Banks can be subject to sectoral and aggregate domestic shocks. After integration they can share these risks in a complete interbank market. When banks have a comparative advantage in providing credit to certain industries, financial integration may induce banks to specialize in lending. An enhanced concentration in lending does not necessarily increase risk, because a well-functioning interbank market allows to achieve the necessary diversification. This greater need for risk sharing, though, increases the risk of cross-border contagion and the likelihood of widespread banking crises. However, even though integration increases the risk of contagion it improves welfare if it permits banks to realize specialization benefits.
Subjects: 
Financial contagion
financial integration
Interbank Market
specialization
JEL: 
D61
E44
G21
Document Type: 
Working Paper

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