## Bank Fragility and International Capital Mobility

_IMF Working Papers, August 1, 1999_

## Source details

**Canonical URL:** [Bank Fragility and International Capital Mobility](https://www.imf.org/en/publications/wp/issues/2016/12/30/bank-fragility-and-international-capital-mobility-3250)

## Other formats

- [Markdown version](/en/publications/wp/issues/2016/12/30/bank-fragility-and-international-capital-mobility-3250/index.md)
- [Structured JSON version](/en/publications/wp/issues/2016/12/30/bank-fragility-and-international-capital-mobility-3250/index.json)
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## Bibliographic details
- Authors: Enrica Detragiache
- Published: August 1, 1999
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451853681.001

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### Summary
- The paper examines the effects of increased financial integration on the economy and, specifically, the welfare of depositors and the business sector.
- A simple model of a small open economy with a fragile banking sector and imperfect capital mobility is developed.
- Increased international integration of the market for bank deposits makes runs on banks more likely and unambiguously hurts the domestic business sector.
- Depositors may gain or lose depending on the parameters.
- Even when depositors gain, the overall effect on the economy depends on the size of foreign assets held relative to the costs of bank crises.

### Main findings
- Increased international integration of the market for bank deposits:
  - makes runs on banks more likely;
  - unambiguously hurts the domestic business sector.
- Welfare outcomes for depositors are parameter-dependent:
  - depositors may gain or lose depending on the parameters of the model.
- Aggregate effect on the economy hinges on a balance:
  - depends on the size of foreign assets held relative to the costs of bank crises.

### Model and mechanism (as described)
- Framework: simple model of a small open economy.
- Key features:
  - fragile banking sector;
  - imperfect capital mobility;
  - international integration of the market for bank deposits as a policy/structural change.
- Mechanism highlighted:
  - greater integration increases vulnerability to bank runs, which transmits losses to the domestic business sector and affects depositor welfare depending on model parameters and the stock of foreign assets.

### Policy-relevant implications (implied by analysis)
- Financial integration can create trade-offs:
  - it may improve opportunities for depositors in some parameter configurations but increases the likelihood of destabilizing bank runs;
  - it imposes unambiguous costs on the domestic business sector through higher run risk.
- Assessment of integration should consider:
  - the size of foreign assets held relative to potential costs of bank crises when evaluating net effects on the economy.

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## Content in this bundle

- **Bank Fragility and International Capital Mobility - WP/99/113**
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  - [Bank Fragility and International Capital Mobility - WP/99/113 (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/1999/_wp99113.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/bank-fragility-and-international-capital-mobility-3250_