Does bank integration contribute to insolvencies and crises?

Abstract

Purpose

This paper aims to construct a measure of integration among global banks and examine its impact on bank insolvencies and bank crises.

Design/methodology/approach

The authors apply principal component analysis to measure a bank’s degree of integration to the global banking market. Moreover, they test whether bank integration affects bank insolvency risk, in which they treat the equity of individual banks as a call option.

Findings

The authors find that the banking industry has become more globally integrated over the past two decades. At the individual bank level, results indicate that banks with higher integration levels have more assets, more nontraditional banking services and more interbank businesses. Overall, they find that a bank’s integration level is negatively associated with insolvency risk, which suggests that greater integration with global markets diversifies a bank’s risk. At the country level, banking systems with less integrated big banks, or more integrated smaller banks, are more stable and hence less likely to suffer a banking crisis.

Originality/value

The authors construct a novel measure of integration among global banks and examine its impact on bank insolvencies and bank crises.

Citation

Sun, Y. and Ni, Y. (2021), "Does bank integration contribute to insolvencies and crises?", Journal of Financial Economic Policy, Vol. 13 No. 1, pp. 62-93. https://doi.org/10.1108/JFEP-01-2020-0020