Working Paper: NBER ID: w1989
Authors: Michael R. Darby
Abstract: The transformation of American banking from the parochialism of 1960 \nto the internationally linked structure of the 1980s is analyzed and \ndetailed quantitatively. While the liberalization of trade and the \nexistence of and changes in financial regulations profoundly affected the \npace and order of this transformation, it is argued that international \nbanking is the historic norm. International banking on the one hand \nprovides the opportunity to banks to diversify their portfolio, but may \nsimultaneously expose them to increased systematic risk, especially with \nregards to movements in the U.S. real interest rate. Deposit insurance \nprovides an incentive for banks to take on such priced systematic risk \nwith welfare costs which must be balanced against the welfare gains from \nthe insurance. The paper closes with an exploration of the nature of the \nlinkage of major movements in real interest rates and exchange rates. \nFurther research seems warranted on monetary-policy-regime changes and \ninvestment-demand shifts as a result of changes in tax, regulatory, and \npolitical climate.
Keywords: International Banking; Systematic Risk; Real Interest Rates; Deposit Insurance
JEL Codes: G21; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| International banking provides opportunities for diversification (F65) | Increased systematic risk (G19) |
| Banks' international activities (F65) | Greater risk due to real interest rate fluctuations (E43) |
| Deposit insurance incentivizes banks to undertake systematic risks (G28) | Potential welfare costs (D69) |
| Real interest rate movements (E43) | Foreign loan defaults (F34) |
| Fluctuations in real interest rates (E43) | Debt burdens of developing countries (F34) |
| Debt burdens of developing countries (F34) | Market value of loans to these countries (F34) |