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International Bank Flows to Emerging Markets: Influence of Sovereign Credit Ratings and Their Regional Spillover Effects

In: Information Spillovers and Market Integration in International Finance Empirical Analyses

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  • Suk-Joong Kim
  • Eliza Wu

Abstract

We examine whether changes in sovereign credit assessments help to determine international bank flows to emerging countries. We focus on the banking flows of G7 countries to a sample of 55 emerging market borrowers for 1995–2008. We find evidence indicating that sovereign credit rating revisions have significant and positive influences on international bank flows from developed markets even after controlling for other determinants. In addition, we find strong regional rating spillover effects. Ratings improvements in one emerging market region tends to reduce bank flows to the other regions. However, there is an exception from the Asia Pacific to Eastern Europe.

Suggested Citation

  • Suk-Joong Kim & Eliza Wu, 2018. "International Bank Flows to Emerging Markets: Influence of Sovereign Credit Ratings and Their Regional Spillover Effects," World Scientific Book Chapters, in: Information Spillovers and Market Integration in International Finance Empirical Analyses, chapter 14, pages 467-515, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789813223585_0014
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    2. David P. Ely & Mehdi Salehizadeh, 2013. "Basel 3, Dodd-Frank and sovereign exposures of US banks," International Journal of Financial Services Management, Inderscience Enterprises Ltd, vol. 6(2), pages 118-137.
    3. Alsakka, Rasha & ap Gwilym, Owain, 2012. "Rating agencies' credit signals: An analysis of sovereign watch and outlook," International Review of Financial Analysis, Elsevier, vol. 21(C), pages 45-55.
    4. Alsakka, Rasha & ap Gwilym, Owain, 2013. "Rating agencies’ signals during the European sovereign debt crisis: Market impact and spillovers," Journal of Economic Behavior & Organization, Elsevier, vol. 85(C), pages 144-162.
    5. Cai, Peilin & Kim, Suk-Joong & Wu, Eliza, 2019. "Foreign direct investments from emerging markets: The push-pull effects of sovereign credit ratings," International Review of Financial Analysis, Elsevier, vol. 61(C), pages 110-125.
    6. Körner, Finn Marten & Trautwein, Hans-Michael, 2015. "Sovereign credit ratings and the transnationalization of finance: Evidence from a gravity model of portfolio investment," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 9, pages 1-54.
    7. Marcin Borsuk & Błażej Lepczyński, 2021. "Rating implikowany a koszt finansowania banków notowanych na Giełdzie Papierów Wartościowych w Warszawie," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 1, pages 87-109.
    8. Borsuk, Marcin & Lepczyński, Błażej, . "Rating implikowany a koszt finansowania banków notowanych na Giełdzie Papierów Wartościowych w Warszawie," Gospodarka Narodowa-The Polish Journal of Economics, Szkoła Główna Handlowa w Warszawie / SGH Warsaw School of Economics, vol. 2021(1).
    9. Seth Nana Kwame Appiah-Kubi & Karel Malec & Mansoor Maitah & Sandra Boatemaa Kutin & Ludmila Pánková & Joseph Phiri & Orhan Zaganjori, 2020. "The Impact of Corporate Governance Structures on Foreign Direct Investment: A Case Study of West African Countries," Sustainability, MDPI, vol. 12(9), pages 1-15, May.
    10. Sahibzada, Irfan Ullah & Rizwan, Muhammad Suhail & Qureshi, Anum, 2022. "Impact of sovereign credit ratings on systemic risk and the moderating role of regulatory reforms: An international investigation," Journal of Banking & Finance, Elsevier, vol. 145(C).
    11. De,Supriyo & Mohapatra,Sanket & Ratha,Dilip K., 2020. "Sovereign Credit Ratings, Relative Risk Ratings, and Private Capital Flows," Policy Research Working Paper Series 9401, The World Bank.
    12. Alsakka, Rasha & ap Gwilym, Owain, 2012. "Foreign exchange market reactions to sovereign credit news," Journal of International Money and Finance, Elsevier, vol. 31(4), pages 845-864.
    13. Cai, Peilin & Gan, Quan & Kim, Suk-Joong, 2018. "Do sovereign credit ratings matter for foreign direct investments?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 55(C), pages 50-64.
    14. Hu, Haoshen & Prokop, Jörg & Trautwein, Hans-Michael, 2022. "Transnational spillover effects of European sovereign rating signals on bank stock returns," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 171-182.
    15. Abad, Pilar & Alsakka, Rasha & ap Gwilym, Owain, 2018. "The influence of rating levels and rating convergence on the spillover effects of sovereign credit actions," Journal of International Money and Finance, Elsevier, vol. 85(C), pages 40-57.
    16. Jae Young Jang & Erdal Atukeren, 2019. "Sustainable Local Currency Debt: An Analysis of Foreigners’ Korea Treasury Bonds Investments Using a LA-VARX Model," Sustainability, MDPI, vol. 11(13), pages 1-23, June.
    17. Williams, Gwion & Alsakka, Rasha & ap Gwilym, Owain, 2013. "The impact of sovereign rating actions on bank ratings in emerging markets," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 563-577.
    18. Williams, Gwion & Alsakka, Rasha & ap Gwilym, Owain, 2015. "Does sovereign creditworthiness affect bank valuations in emerging markets?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 36(C), pages 113-129.
    19. Chen, Ting-Hsuan & Lee, Chien-Chiang, 2020. "Spatial analysis of liquidity risk in China," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    20. Luitel, Prabesh & Vanpée, Rosanne, 2018. "How do sovereign credit ratings help to financially develop low-developed countries?," ECMI Papers 13956, Centre for European Policy Studies.

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    JEL classification:

    • F30 - International Economics - - International Finance - - - General

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