The Internationalization of American Banking and Finance: Structure, Risk, adn World Interest Rates

Michael R. Darby

NBER Working Paper No. 1989 (Also Reprint No. r0830)
Issued in July 1986
NBER Program(s):   ITI   IFM

The transformation of American banking from the parochialism of 1960

to the internationally linked structure of the 1980s is analyzed and

detailed quantitatively. While the liberalization of trade and the

existence of and changes in financial regulations profoundly affected the

pace and order of this transformation, it is argued that international

banking is the historic norm. International banking on the one hand

provides the opportunity to banks to diversify their portfolio, but may

simultaneously expose them to increased systematic risk, especially with

regards to movements in the U.S. real interest rate. Deposit insurance

provides an incentive for banks to take on such priced systematic risk

with welfare costs which must be balanced against the welfare gains from

the insurance. The paper closes with an exploration of the nature of the

linkage of major movements in real interest rates and exchange rates.

Further research seems warranted on monetary-policy-regime changes and

investment-demand shifts as a result of changes in tax, regulatory, and

political climate.

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Document Object Identifier (DOI): 10.3386/w1989

Published: Darby, Michael R."The Internationalization of American Banking and Finance:structure, Risk, and World Interest Rates," Journal of International Money and Finance, Vol. 5, No. 4, (December 1986). citation courtesy of

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