Tilburg University - Finance Department
Institutional Affiliation: Tilburg University
Information about this author at RePEc
NBER Working Papers and Publications
|April 2017||Financial Integration and Liquidity Crises|
with Fabio Feriozzi, Guido Lorenzoni: w23359
The paper analyzes the effects of financial integration on the stability of the banking system. Financial integration allows banks in different regions to smooth local liquidity shocks by borrowing and lending on a world interbank market. We show under which conditions financial integration induces banks to reduce their liquidity holdings and to shift their portfolios towards more profitable but less liquid investments. Integration helps reallocate liquidity when different banks are hit by uncorrelated shocks. However, when a correlated (systemic) shock hits, the total liquid resources in the banking system are lower than in autarky. Therefore, financial integration leads to more stable interbank interest rates in normal times, but to larger interest rate spikes in crises. These results ho...
Published: Fabio Castiglionesi & Fabio Feriozzi & Guido Lorenzoni, 2019. "Financial Integration and Liquidity Crises," Management Science, vol 65(3), pages 955-975.