Puzzling retrenchment of banking outflows: The role of information asymmetry

We reexamine whether information asymmetry can explain the puzzling retrenchment of bank capital outflows when domestic uncertainty is high. Using bilateral banking flow data, we confirm the previous findings that both bank claims and liabilities decline in face of domestic uncertainty, regardless of the counterparty’s geographical distance and whether to share a common language or currency with it. When employing the level of financial development as a measure of the degree of information sharing, we find that the retrenchment of outflows in response to domestic uncertainty significantly declines if the country is better financially developed. Therefore, information asymmetry plays a role in explaining the puzzle.