LFE Research Seminar by Fabio Castiglionesi (Tilburg University): «Financial Integration and Liquidity Crises»
May 30 at 4.40 pm , room 3211 (Shabolovka str. 26) International College of Economics and Finance and International Laboratory of Financial Economics held the Research Seminar in Finance.
Speaker: Fabio Castiglionesi (Tilburg University)
Theme: «Financial Integration and Liquidity Crises»
Venue: Shabolovka str. 26, building 3, room 3211
Abstract: This paper analyzes the effects of international financial integration on the stability of the banking system. Financial integration allows banks in different countries to smoothlocal liquidity shocks by borrowing on the international interbank market. We show that, under realistic conditions, fi nancial integration induces banks to reduce their liquidity holdings and to shift their portfolios towards more pro table but less liquid investments. Integration helps to reallocate liquidity when different countries are hit by uncorrelated shocks. However, when an aggregate, worldwide shock hits, the aggregate liquid resources in the banking system are lower than in autarky. Therefore, nancial integration leads to more stable interbank interest rates in normal times, but to larger interest rate spikes in crises. Similarly, on the real side, financial integration leads to more stable consumption in normal times and to larger consumption drops in crises. These results hold in a setup where financial integration is welfare improving from an ex ante point of view. We also look at the models implications for nancial regulation and show that, in a second-best world, nancial integration can increase the welfare bene ts of liquidity requirements.