Cross-border banking in regulated markets: Is financial integration desirable?

Haufler, Andreas und Wooton, Ian (Oktober 2016): Cross-border banking in regulated markets: Is financial integration desirable? Münchener Wirtschaftswissenschaftliche Beiträge (VWL) 2016-15

Abstract

We set up a two-country, regional model of trade in financial services. Competitive firms in each country manufacture untraded 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 share of its lending allocated between domestic and foreign firms, but 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 transaction costs of cross-border banking reduces aggregate output and increases risk-taking, thus harming consumers and tax-payers in both countries. In contrast, a reduction in the costs of screening foreign firms is likely to be beneficial for banks, consumers, and taxpayers alike.

• Dokumententyp: Paper
• Keywords: cross-border banking, capital regulation, financial integration
• Fakultät: Volkswirtschaft > Munich Discussion Papers in Economics > Finanzwissenschaft
• Themengebiete: 300 Sozialwissenschaften > 330 Wirtschaft
• JEL Classification: F36, G18, H81
• Sprache: Englisch

Literaturliste

Acharya, V. (2003). Is the international convergence of capital adequacy regulation desirable? Journal of Finance 58, 2745-2781.

Acharya, V., Hasan, I., Sauners, A. (2006). Should banks be diversified? Evidence from individual bank loan portfolios. Journal of Business 49, 1355-1412.

Allen, F., Carletti, E., Marquez, R. (2011). Credit market competition and capital regulation. Review of Financial Studies 24, 983-1018.

Beltratti, A., Stulz, R.M. (2012). The credit crisis around the globe: Why did some banks perform better? Journal of Financial Economics 105, 1-17.

Barth, J., Lee, C., Phumiwasana, T. (2006). Deposit insurance schemes. In: Ch. Lee and A. Lee (eds.), Encyclopedia of Finance, 299-306.

Besanko, D., Kanatas, G. (1993). Credit market equilibrium with bank monitoring and moral hazard. Review of Financial Studies 6, 213-232.

Berger, A., Miller, N., Petersen, M., Rajan, R., Stein, J. (2005). Does function follow organizational form? Evidence from the lending practices of large and small banks. Journal of Financial Economics 76, 237-268.

Boot, A., Thakor, A. (2000). Can relationship banking survive competition? Journal of Finance 55, 679-713.

Brander, J., Krugman, P. (1983). A “reciprocal dumping" model of international trade. Journal of International Economics 15, 313-321.

Buch, C., Koch, C.T., Koetter, M. (2011). Size, productivity, and international banking. Journal of International Economics 85, 329-334.

Buch, C., Koch, C.T., Koetter, M. (2013). Do banks benefit from internationalization? Revisiting the market power-risk nexus. Review of Finance 17, 1401-1435.

Claessens, S., van Horen, N. (2014). Foreign banks: Trends and impact. Journal of Money, Credit and Banking 46 (Supplement No.1), s295-s326.

Committee on the Global Financial System (2010). Long-term issues in international banking. CGFS Papers No. 41. Bank for International Settlements, Basel. De Blas, B., Russ, K.N. (2013). All banks great, small, and global: Loan pricing and foreign competition. International Review of Economics and Finance 26, 4-24.

De Nicol o, G., Gamba, A., Lucchetta, M. (2012). Capital regulation, liquidity requirements and taxation in a dynamic model of banking. IMF Working Paper 12/72. Washington, D.C.

Degryse, H., Ioannidou, V., Liberti, J.M., Sturgess, J. (2016). When do laws and institutions affect recovery rates on collateral? CEPR Discussion Paper No. 11406. London.

Dell'Ariccia, G., Marquez, R. (2006). Competition among regulators and credit market integration. Journal of Financial Economics 79, 401-430.

Deng, S., Elyasiani, E. (2008). Geographic diversi cation, bank holding company value, and risk. Journal of Money, Credit and Banking 40, 1217-128.

Diamond, D., Dybvig, P. (1983). Bank runs, deposit insurance, and liquidity. Journal of Political Economy 91, 401-419.

Diamond, D.W., Rajan, R. (2009). The credit crisis: Conjectures about causes and remedies. American Economic Review 99, Papers and Proceedings, 606-610.

Eaton, J. (1994). Cross-border banking. NBER Working Paper No. 4686. Washington, D.C.

European Commission (2015a). Action plan on building a capital markets union. Document COM(2015) 468. Brussels.

European Commission (2015b). Proposal for a regulation laying down common rules on securitization and creating a European framework for simple, transparent and standardized securitization. Document COM(2015) 472. Brussels.

Francois, J, Hoekman, B. (2010). Services trade and policy. Journal of Economic Literature 48, 642-692.

Goetz, M., Laeven, L., Levine, R. (2016). Does the geographic expansion of bank assets reduce risk? Journal of Financial Economics 120, 346-362. Haufler, A., Maier, U. (2016). Regulatory competition in capital standards with selection effects among banks. CESifo Working Paper No. 5839. Munich.

Haufler, A., Wooton, I. (2010). Competition for firms in an oligopolistic industry. The impact of economic integration. Journal of International Economics 80, 239-248.

Hellman, T., Murdock, K., Stiglitz, J. (2000). Liberalization, moral hazard in banking, and prudential regulation: Are capital requirements enough? American Economic Review 90, 147-165.

Kind, H.J., Midelfart, K.H., Schjelderup, G. (2005). Corporate tax systems, multinational enterprises, and economic integration Journal of International Economics 65, 507-521.

Lehner, M., Schnitzer, M. (2008). Entry of foreign banks and their impact on host countries. Journal of Comparative Economics 36, 430-452.

Niepmann, F. (2015). Banking across borders. Journal of International Economics 96, 244-265.

Ongena, S., Popov, A., Udell, G. (2013). “When the cat's away the mice will play": Does regulation at home affect bank risk-taking abroad? Journal of Financial Economics 108, 727-750.

Ottaviano G., van Ypersele, T. (2005). Market size and tax competition. Journal of International Economics 67, 25-46.

Portes, R., Rey, H. (2005). The determinants of cross-border equity flows. Journal of International Economics 65, 269-296.

Portes, R., Rey, H., Oh, Y. (2001). Information and capital flows: The determinants of transactions in financial assets.European Economic Review 45, 783-796.

Rochet, J.-Ch. (1992). Capital requirements and the behaviour of commercial banks. European Economic Review 36, 1137-1178.

Sinn, H.W. (1997). The selection principle and market failure in systems competition. Journal of Public Economics 66, 247-274.