Bank Secrecy and Capital Flows: Does the International Stigma Matter?

Abstract

This study analyses the cross border capital flows in order to verify existence and direction of the so called stigma effect: Is the soft regulation against banking secrecy promoted by the international organization effective? We test if the FAFT listing-delisting events are effective sticks and carrots for the targeted countries in influencing their cross border flows. The tests are based on a theoretical framework, where the stigma effect holds if doing business with a listed country produces non linear monetary and/or reputational costs. We applied our model on 126 countries worldwide in the period 1996-2007 using annual panel data. We find evidence that the stigma mechanism can influence the banking flows, provided that some conditions hold. The relevance of the stigma effect seems to depend on the one side on the efficiency of the international capital markets and on the other side on specific features of the listed/delisted country: regulatory lightness, banking profitability, growth per capita.

Keywords: bank secrecy, international capital flows, name and shame regulation, money laundering

JEL Classification: F21, K42