Banking Integration Research Articles

Policy Externalities and Banking Integration

Policy Externalities and Banking Integration

Lessons for Asia from Europe's History with Banking Integration

As Asia considers greater harmonization and integration of its financial systems, it would be well-advised to consider the experience of Europe, particularly the eurozone. There are many lessons to be drawn from Europe about how to implement such integration, mostly negative. It is particularly evident that moving to a currency union had major unanticipated consequences for the ability to manage integration of financial systems within the eurozone. Monetary union sharply reduced the ability of the member states of the eurozone to manage their macroeconomic and macroprudential policies to preserve financial stability. Even setting aside these additional problems created by monetary union, Europe suffered substantial harm from integrating its financial systems so closely in many ways, while simultaneously establishing only very weak coordinating mechanisms among their national financial supervisors. It was also a mistake to forbid the European Central Bank from operating formally as a lender of last resort in a financial crisis.Europe’s experiences should not dissuade Asia from seeking appropriate further harmonization and integration. However, they do argue strongly for Asia to take the kind of careful, step-by-step, long-term approach for which many of the countries within Asia are well known. In particular, Asia should only move forward to the extent that it is willing to take the necessary steps toward common supervisory approaches, information sharing, and cooperation in crises. Trying to have the benefits of integration without the responsibilities would be a recipe for future disaster.

Financial Markets, Banking and the Design of Monetary Policy: A Stable Baseline Scenario

A baseline integration of commercial banks into the disequilibrium framework with behavioral traders of Charpe et al. (2011, 2012) is presented. At the core of the analysis is the impact the banking sector exerts on the interaction of real and financial markets. Potentially destabilizing feedback channels in the presence of imperfect macroeconomic portfolio adjustment and heterogeneous expectations are investigated. Given the possible financial market instability, various policy instruments have to be applied in order to guarantee viable dynamics in the highly interconnected macroeconomy. Among those are open market operations reacting to the state-of-confidence in the economy and Tobin-type capital gain taxes. The need for policy intervention is even more striking, as the banking sector is modeled in a rather stability enhancing way, fulfilling its fundamental tasks of term transformation of savings and credit granting without engaging in investment activities itself.

Banking Integration and House Price Comovement

The correlation across US states in house price growth increased steadily between 1976 and 2000. This paper shows that the contemporaneous geographic integration of the US banking market, via the emergence of large banks, was a primary driver of this phenomenon. To this end, we first theoretically derive an appropriate measure of banking integration across state pairs and document that house price growth correlation is strongly related to this measure of financial integration. Our IV estimates suggest that banking integration can explain up to one fourth of the rise in house price correlation over this period.

The global financial crisis and integration in European retail banking

The aim of this paper is twofold. Firstly, to investigate the integration process within the European Union retail banking sector by analysing deposit and lending rates to the household sector during the period 2003–2011. Secondly, to assess the impact of the 2008 global financial crisis on the banking integration process, an area that is yet unexplored. An important contribution of the paper is the application of the recently developed Phillips and Sul (2007a) panel convergence methodology which has not hitherto been employed in this area. This method analyses the degree as well as the speed of convergence, identifies the presence of club formation, and measures the behaviour of each country’s transition path relative to the panel average. The empirical results point to the presence of convergence in all deposit and lending rates to the household sector up to 2007. In sharp contrast, the null of convergence is rejected in all deposit and credit markets after the onset of the 2008 financial crisis. These results show that the global crisis has had a detrimental effect on the banking integration process. We find some convergence in a few sub-clusters of countries but the rate of convergence is typically slow and several countries are identified as diverging altogether. In addition, we find that the credit market, in general, is far more heterogeneous than the savings market.

Currency Union with and Without Banking Union

This paper analyzes a two-country model of currency, banks and endogenous default to study whether impediments to credit market integration across jurisdictions impact the desirability of a currency union. We show that when those impediments induce a higher cost for banks to manage cross-border credit compared to domestic credit, welfare may not be maximal under a regime of currency union. But a banking union that would suppress hurdles to banking integration restores the optimality of that currency arrangement. The empirical and policy implications in terms of banking union are discussed.

The process of Europeanization of law in the context of Czech law

The paper is focused on the draft of the process of Europeanization of law. The process of European integration is often understood mainly as an economic process which aims towards the world-wide integration and organization of manufacturing, commercial, banking and financial operations, technologies and information. It is, however, a complex social phenomenon which represents – in addition to economical transformations – a rather complicated cultural, social, political and legal process with an extremely broad impact in all areas of life. Europeanization, the notion increasingly used in connection with the process of European integration, significantly modifies the Czech legal environment, which is regarding to the sphere of enterprise too. Europeanization of law manifests with multi-centrism of sources of law, which brings specific problems both to the bodies which interpret and apply law and also into the legal position of legal entities and their legal awareness.

Commercial Banking and Shadow Banking: The Accelerating Integration of Banks and Markets and Its Implications for Regulation

In this chapter we examine the implications of the increasing integration of banks and financial markets for the evolution of each as well the design of prudential regulation. The growth of the use of depository-banking-originated mortgage-backed securities sold in the market and used as collateral to back short-term funding transactions in the shadow banking sector illustrates this intertwining of banks and markets, and the potential systemic risk dangers of this, as is apparent from the recent crisis. An important implication of this integration is that it is becoming more and more difficult to isolate banking risks from financial market risks. Building on contemporary theories of financial intermediation, relationship banking and securitization, we show how these theories inform us about the underlying causes of the seismic shifts that have occurred in financial markets in recent years, and what they suggest about the kinds of regulatory reforms that may be most fruitful. We end with a list of open research questions suggested by our analysis.

Financial Regulation, Financial Globalization, and the Synchronization of Economic Activity

ABSTRACTWe analyze the impact of financial globalization on business cycle synchronization using a proprietary database on banks’ international exposure for industrialized countries during 1978 to 2006. Theory makes ambiguous predictions and identification has been elusive due to lack of bilateral time‐varying financial linkages data. In contrast to conventional wisdom and previous empirical studies, we identify a strong negative effect of banking integration on output synchronization, conditional on global shocks and country‐pair heterogeneity. Similarly, we show divergent economic activity due to higher integration using an exogenous de‐jure measure of integration based on financial regulations that harmonized EU markets.

Crisis de la deuda soberana y apalancamiento en la zona euro: un intento de cuantificación

From the perspective provided by more than three years from the start of the euro area sovereign debt crisis, it can be observed that its origin goes beyond fiscal imbalances in the euro countries. The interconnection between private and public debt is obvious. Moreover, the transmission of the crisis through the banking system is obvious, given the high banking integration between European Economic and Monetary Union (EMU) countries. These facts have led to the analysis carried out in this paper, and presents an attempt to quantify the level of global indebtedness (public and private) of all eurozone countries, using a database that has been built up with the statistics provided by the European Central Bank, and on foreign banks’ claims on the debt of EMU countries, using data supplied by the Bank for International Settlements.

‘By a Silken Thread’: Regional Banking Integration and Pathways to Financial Development in Japan's Great Recession

During Japan’s ‘Lost Decade’, reallocation of credit through the internal capital markets of country-wide banks mitigated the real effects from the bank liqudity shock in prefectures with many bank-dependent SMEs. We document that the regional fragmentation of banking markets in Japan goes back to the institutions set up for silk export finance in the late 19th century. Using silk as an instrument for modern-day regional banking integration, we find even stronger evidence of credit reallocation than in our baseline OLS-specifications. The sign of this OLS-bias is consistent with the underlying heterogeneity in bank-firm matches implied by the theory.

Banking Crises and Financial Integration

This paper explores whether the level of financial integration of banks in a country increases the incidence of systemic banking crises. The paper uses a de facto proxy for financial integration based on network statistics of banks participating in the global market of interbank syndicated loans. Specifically, the network statistics degree and betweenness are used to proxy for the de facto integration of the average bank in a country. The paper fits a count data model in the cross-section for the period 1980- 2007 and finds that the level of integration of the average bank is a robust determinant of the incidence of banking crises. An increased level of de facto integration as mea- sured by borrowing by banks is positively associated with the incidence of crises. A higher level of de jure integration (capital account openness) is also associated with a higher incidence of crises. However, the results also indicate that prudential banking regulation (supervision) plays a crucial and much larger role in reducing the incidence of crises. Interestingly, the results also show that the level of integration as measured by betweenness of the average bank has a negative effect on the incidence of crises. That is, the more important the average bank of a country is to the global bank network, the fewer the number of crises the country endures.

'By a Silken Thread': Regional Banking Integration and Pathways to Financial Development in Japan's Great Recession

How do financial development and financial integration interact? We focus on Japan’s Great Recession after 1990 to study this question. Regional differences in banking integration affected how the recession spread across the country: financing frictions for credit-dependent firms were more severe in less integrated prefectures, which saw larger decreases in lending by nationwide banks and lower GDP growth. We explain these cross-prefectural differences in banking integration by reference to prefectures’ different historical pathways to financial development. After Japan’s opening to trade in the 19th century, silk reeling emerged as the main export industry. The silk reeling industry depended heavily on credit for working capital but comprised many small firms that could not borrow directly from larger banks. Instead, silk merchants in Yokohama, the main export hub for silk, provided silk reelers with trade loans. Many regional banks in Japan were founded as local clearing houses for such loans, and regional banks continued to account for above-average shares in lending in the formerly silk-exporting prefectures long after the decline of the silk industry. Using the cross-prefectural variation in the number of silk filatures in 1895 as an instrument, we confirm that the post-1990 decline was worse in prefectures where credit constraints were tightened through low levels of banking integration. Our findings suggest that different pathways to financial development can lead to long-term differences in de facto financial integration, even if there are no formal barriers to capital mobility between regions, as is the case in modern Japan.

Bank Integration and Systemic Risk: Panacea or Pandemic?

Bank Integration and Systemic Risk: Panacea or Pandemic?

Integrating Credit and Market Risk: A Factor Copula based Method

This paper presents a factor copula model for the integration of Chinese commercial banks’ credit risk and market risk. By defining the dependence structure through a set of common factors reflecting the macro-economic situation, this model reveals the intrinsic correlation between credit risk and market risk. We derive the integration process with factor copula and generate common factors by performing a principal component analysis on 4 different macro-economic indicators that have impact on bank's profit, namely the GDP growth, M2 growth, benchmark for loan rate, and the ratio of new loans to GDP. In the empirical study, 15 Chinese listed banks are chosen to construct the model. The results are compared with that of elliptical copulas and Archimedean copulas, we find that factor copula gives a more prudential result in risk integration.

Developments in the Banking Integration Process of the New EU Member States

The integration of the banking sector represents a key component of the whole European integration process, as banks are, in many European countries the main suppliers of funds to the economy. The academic literature on this subject provides a split view on the integration of the European banking sector, this process being divided between the EU-15 countries and the new member states. In this context and considering the relative homogeneity of the new member states, regarding their transition from centralised economies to market economies and afterwards their EU ascension, the aim of our paper is to analyze if the return on assets of the banks from these states converge toward a common value, this fact underling a deepening of the banking integration process. In order to achieve this we have used a modified version of the partially adjustment equation, measuring the speed of convergence toward a common value of the return to assets, while also testing the statistical significance of the obtained results.

Integration in European retail banking: Evidence from savings and lending rates to non-financial corporations

The aim of this paper is to investigate the integration process in the European Union retail banking sector during the period 2003–2011, by analysing deposit and lending rates to non-financial corporations. An important contribution of the paper is the application of the recently developed Phillips and Sul (2007a) panel convergence methodology which has not hitherto been employed in this area. This method analyses the degree as well as the speed of convergence, identifies the presence of club formation, and measures the behaviour of each country's transition path relative to the panel average. In addition, this is the first empirical paper that analyses the impact of the 2008 global financial crisis on the European retail banking integration process. The empirical results point to the presence of convergence in all deposit and lending rates to non-financial corporations up to 2007. In contrast, the null of convergence is rejected in all deposit and credit markets after the onset of the 2008 financial crisis. Although we still find slow convergence in a few sub-clusters of countries, the transition paths become very divergent, with the credit market being far more heterogeneous than the savings market.

Fiscal and Monetary Policy Determinants of the Eurozone Crisis and Its Resolution

Unlike the crisis years of 2007-2009 (when the insolvency of large banks was a major problem), the current round of the global financial crisis has fiscal origins. Almost all developed countries suffer from an excessive public debt burden that has been built up over the last two decades or more. The financial crisis caused a further deterioration of government accounts as a result of ill-tailored countercyclical fiscal response and, in some cases, a costly financial sector rescue. All excessively indebted countries must conduct fiscal adjustment, even if this involves economic and political costs in terms of lower output and higher unemployment. Central banks can reduce these costs through accommodative monetary policies but without compromising their anti-inflationary missions and institutional independence. The ECB is additionally constrained by its institutional status which is based on a delicate cross-country political consensus. Excessive ECB involvement in quasi-fiscal rescue operations can undermine this consensus and lead to a disintegration of the Eurozone. There are also strong arguments in favor of strengthening fiscal and banking integration within the EU, especially the fiscal discipline mechanism at national levels, and building the EU rescue capacity in respect to sovereigns and banks based on strong policy conditionality.

Systematic Differences of Retail Exchange Rate Spreads in Some EU Countries: The Banks Against Financial Integration

An important policy goal in European Union has been integration of markets and economic convergence. The aim of this exploratory paper is to study pricing of currency exchange services based on bid-ask spreads in commercial banks and the policy implications of the delayed integration of banking markets. The currency rate spreads in different bank groups and countries are compared with each other. The main results of the study are that statistically significant differences exist in the spreads set by banking groups in different countries. All banking groups in the sample offer more favorable rates in Western countries indicating that the pricing policy of bank groups may be discriminatory. Further research is needed to understand the extent and the mechanism of it and to determine which policy measures may help to overcome the problem.

Banking Crises and Financial Integration

This paper explores whether the level of financial integration of banks in a country increases the incidence of systemic banking crises. The paper uses a de facto proxy for financial integration based on network statistics of banks participating in the global market of interbank syndicated loans. Specifically, the network statistics degree and betweenness are used to proxy for the de facto integration of the average bank in a country. The paper fits a count data model in the cross-section for the period 1980- 2007 and finds that the level of integration of the average bank is a robust determinant of the incidence of banking crises. An increased level of de facto integration as mea- sured by borrowing by banks is positively associated with the incidence of crises. A higher level of de jure integration (capital account openness) is also associated with a higher incidence of crises. However, the results also indicate that prudential banking regulation (supervision) plays a crucial and much larger role in reducing the incidence of crises. Interestingly, the results also show that the level of integration as measured by betweenness of the average bank has a negative effect on the incidence of crises. That is, the more important the average bank of a country is to the global bank network, the fewer the number of crises the country endures.