What drives international bank flows? Politics, institutions and other determinants
AbstractThis paper uses a large panel of bilateral bank flow data to assess how institutions and politics affect international capital -bank in particular- flows. The following key findings emerge: 1) The empirical "gravity" model is the benchmark in explaining the volume of international banking activities. 2) Conditioned on standard gravity factors (distance, GDP, population), well-functioning institutions are a key driving force for international bank flows. Specifically, foreign banks invest substantially more in countries with i) uncorrupt bureaucracies, ii) high-quality legal system, and iii) a non-government controlled banking system. 3) Beyond institutions, politics exert also a firstorder impact. 4) The European Integration process has spurred cross-border banking activities between member states. These results are robust to various econometric methodologies, samples and the potential endogeneity of institutional characteristics. The strong institutions/politics-bank flows nexus has strong implications for asset trade and international macro theories, which have not modelled these relationships explicitly. JEL Classification: F34, F21, G21, K00
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Date of creation: Feb 2005
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Find related papers by JEL classification:
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- K00 - Law and Economics - - General - - - General (including Data Sources and Description)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-10-04 (All new papers)
- NEP-FIN-2005-10-04 (Finance)
- NEP-FMK-2005-10-04 (Financial Markets)
- NEP-LAW-2005-10-04 (Law & Economics)
- NEP-POL-2005-10-04 (Positive Political Economics)
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