Causes and Consequences of International Bank Flows
51 Pages Posted: 7 Aug 2009
Date Written: August 3, 2009
Abstract
We investigate the factors influencing international bank flows from 26 source countries to 120 recipient countries over the past two decades and consider the implications of these flows. Controlling for other factors, we find that the bank flows are positively related to the quality of institutions such as the level of creditor rights protection, the level of property right protection, and the level of information sharing within the recipient country, and that geographical and cultural differences between countries limit the flow of bank capital. Additionally, we consider whether cross-country differences in regulations affect the flow of capital. Using the world-wide bank regulation datasets compiled by Barth, Caprio and Levine (2008), we find evidence suggesting that a type of “regulatory arbitrage” takes place, where banks are more likely to transfer funds to markets with fewer banking regulations. In one positive respect, our results indicate that countries can help obtain foreign capital by establishing strong protection for creditors and limited regulation. At the same time, the existence of regulatory arbitrage raises the concerns posted by Acharya, Wachtel, and Walter (2009), and reinforces the need for global coordination in banking regulation. Finally, we present evidence suggesting that international bank flows help reduce external financing constraints among borrowing firms. These results are more pronounced for smaller firms in less developed countries.
Keywords: International Bank Flow, Institutional Distance, Regulatory Arbitrage
JEL Classification: G21, G28, G30
Suggested Citation: Suggested Citation
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