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

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Abstract
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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