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Threshold effect of economic openness on bank risk-taking: Evidence from emerging markets

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  • Bui, Tung Duy
  • Bui, Hoai Thi Mai

Abstract

This paper investigates the non-linear effects of two aspects of economic openness, namely, trade openness and financial openness, on banking system stability. We use a panel of 42 emerging markets from 2000 to 2014 to test whether bank risk-taking behaviour varies with the level of openness. We find that a higher degree of trade openness promotes bank stability linearly. Conversely, the non-linear effect of financial openness on bank risk-taking is evident. When the financial system is not sufficiently open, the impact of financial openness on bank stability is insignificant. However, as the domestic financial market becomes more open, financial openness can help discipline the behaviour of banks, making them more stable. We also find evidence that these effects are transmitted through the market discipline channel. Our findings highlight the importance of strengthening the domestic regulatory framework and transparency as the economy becomes more integrated.

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  • Bui, Tung Duy & Bui, Hoai Thi Mai, 2020. "Threshold effect of economic openness on bank risk-taking: Evidence from emerging markets," Economic Modelling, Elsevier, vol. 91(C), pages 790-803.
    • Handle: RePEc:eee:ecmode:v:91:y:2020:i:c:p:790-803
    DOI: 10.1016/j.econmod.2019.11.013
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    More about this item

    Keywords

    Financial openness; Trade openness; Panel smooth transition regression; Bank risk-taking;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • F30 - International Economics - - International Finance - - - General
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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