Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/185769
Authors: 
Haufler, Andreas
Wooton, Ian
Year of Publication: 
2018
Series/Report no.: 
Discussion Paper 99
Abstract: 
We set up a two-country, regional model of trade in financial services. Competitive firms in each country manufacture non-traded consumer goods in an uncertain productive environment, borrowing funds from a bank in either the home or the foreign market. Duopolistic banks can choose their levels of monitoring of firms and thus the levels of risk-taking, where the risk of bank failure is partly borne by taxpayers in the banks\' home countries. Moreover, each bank chooses the allocation of its lending between domestic and foreign firms, while the bank\'s overall loan volume is fixed by a capital requirement set optimally in its home country. In this setting we consider two types of financial integration. A reduction in the compliance costs of cross-border banking reduces aggregate output and increases risk-taking, thus harming consumers and taxpayers in both countries. In contrast, a reduction in the costs of screening foreign firms is likely to be eneficial for banks, consumers, and taxpayers alike.
Subjects: 
multinational banks
foreign direct investment
capital regulation
financial integration
JEL: 
F36
G18
H81
Document Type: 
Working Paper

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