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Kiel Institute for World Economics Kiel Working Papers, Kiel Institute for World Economics

No 932:
Capital Mobility in Euroland ; The Role of Banks

Claudia M. Buch

Abstract: The introduction of the euro marks a milestone in the process of European financial market integration. This paper analyzes the implications of the euro for cross-border banking activities. A portfolio model is used which captures the role of banks as providers of informational and of risk-diversification services. By eliminating exchange rate risks, the euro enhances the incentives of banks to expand within Euroland. Yet, while the currency bias in bank portfolios will be eliminated, the home bias will remain. It is also argued that positive diversification effects may outweigh possible negative effects on the risk taking of banks.

Keywords: capital mobility, European financial integration, banking, asymmetric information, portfolio choice; (follow links to similar papers)

JEL-Codes: D82; F36; G21; (follow links to similar papers)

34 pages, June 1999

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