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The determinants of cross-border bank flows to emerging markets: New empirical evidence on the spread of financial crises

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  • Herrmann, Sabine

    ()
    (BOFIT)

  • Mihaljek, Dubravko

    (BOFIT)

Abstract

This paper studies the nature of spillover effects in bank lending flows from advanced to the emerging market economies and identifies specific channels through which such effects occur. We examine a panel data set of cross-border bank flows from 17 advanced to 28 emerging market economies in Asia, Latin America and central and eastern Europe from 1993 to 2008. Our empirical framework is based on a gravity model of financial flows. We augment this model with global, lender and borrower country risk factors, as well as financial and monetary integration variables. The empirical analysis suggests that global as well as country specific factors are significant determinants of cross-border bank flows. Greater global risk aversion and expected financial market volatility have been the most important factors behind the decrease in cross-border bank flows during the crisis of 2007–08. The decrease in cross-border loans to central and eastern Europe was more limited compared to Asia and Latin America, in large measure because of the higher degree of financial and monetary integration in Europe, and relatively sound banking systems in the region. These results are robust to various specification, sub-samples and econometric methodologies.

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Bibliographic Info

Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 3/2011.

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Length: 48 pages
Date of creation: 05 Apr 2011
Date of revision:
Handle: RePEc:hhs:bofitp:2011_003

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Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland
Phone: + 358 10 831 2268
Fax: + 358 10 831 2294
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Web page: http://www.suomenpankki.fi/bofit_en/
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Keywords: gravity model; cross-border bank flows; financial crises; emerging market economies; spillover effects; panel data;

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  1. Sabine Herrmann & Dubravko Mihaljek, 2010. "The determinants of cross-border bank flows to emerging markets: new empirical evidence on the spread of financial crises," BIS Working Papers 315, Bank for International Settlements.
  2. Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc.
  3. Reinhart, Carmen & Kaminsky, Graciela & Vegh, Carlos, 2003. "The unholy trinity of financial contagion," MPRA Paper 13878, University Library of Munich, Germany.
  4. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, vol. 51(1), pages 145-168, June.
  5. International Monetary Fund, 2000. "Spillovers Through Banking Centers," IMF Working Papers 00/88, International Monetary Fund.
  6. Morris Goldstein & Carmen M. Reinhart, 2000. "Assessing Financial Vulnerability: An Early Warning System for Emerging Markets," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 100.
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