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

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.