Financial integration allows domestic banks access to the global pool of savings, offering funds at a cost of r0. We assume that the autarky banks’ cost of funds exceeds the global risk free interest rate [p > ra]. Hence, financial integration is viewed as a process that reduces the banks’ cost of funds to the global level. In these circumstances the patterns of risk undertaking and investment are summarized by (12), where the banks’ cost of funds, rc , drops from p to rQ.

The welfare contribution of domestic investment with financial integration is obtained by (15), evaluated for the investment (x) and risk (Д) that correspond to rc = r0. To simplify discussion, we assume that domestic consumers can not borrow against future income, hence their saving is zero when rc = r0. With these assumptions the savers’ surplus is zero, and (15) is the exact welfare function.

We can apply (15) to identify the socially optimal level of risk. This would correspond to an equilibrium where banks brake even, investors finance all projects offering non-negative expected rents, and the riskiness is determined by a policy maker who maximizes (15).

Claim 4

The socially optimal risk (Д5) and investment (xs) for the constant elasticities example, with /(*) = !, is characterized by
equation (12’b) is obtained by solving (16) for x. Recall that x is determined by the brake even condition in the competitive allocation – all the projects offering non negative expected rents are financed. In these circumstances (8) and (9) continue to hold, and consequently (1-Д)Д%)(Зс)-^ = k(l-£l)t + (l + rc)H .
Equation (12’a) is obtained by applying this condition to (16), solving for Д. debit card payday loans