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Financial Globalization and the Governance of Domestic Financial Intermediaries

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  • Thierry Tressel

    (PSE - Paris-Jourdan Sciences Economiques - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique, IMF - International Monetary Fund - International Monetary Fund (IMF), PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CEPR - Center for Economic Policy Research, University of Southampton)

  • Thierry Verdier

    (PSE - Paris-Jourdan Sciences Economiques - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, University of Southampton)

Abstract

We model a small open economy in which both domestic financial intermediaries and entrepreneurs face incentive constraints, as in Holmstrom and Tirole (1997), to study the general equilibrium impact of various types of capital inflows on the efficiency and governance of domestic banks. Banks have an advantage in monitoring firms, but the latter can collude with banks and offer side-payments to reduce the intensity of monitoring. Opening up to international capital flows makes domestic banks' capital scarcer relative to uninformed capital, thus increasing the relative cost of monitoring. We show that capital account liberalization has ambiguous effects on the governance of the domestic financial system by sometimes increasing firms' incentives to collude with banks. We characterize the conditions under which governance is more likely to deteriorate after opening up the capital account, and discuss the effects on investment, productivity and output. We also analyze the effects of foreign direct investment in the corporate and banking sectors. Stylized facts are consistent with the predictions of the model.

Suggested Citation

  • Thierry Tressel & Thierry Verdier, 2011. "Financial Globalization and the Governance of Domestic Financial Intermediaries," Post-Print halshs-00754560, HAL.
    • Handle: RePEc:hal:journl:halshs-00754560
    DOI: 10.1111/j.1365-2966.2010.01003.x
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    Cited by:

    1. Mr. Thierry Tressel & Mr. Thierry Verdier, 2014. "Optimal Prudential Regulation of Banks and the Political Economy of Supervision," IMF Working Papers 2014/090, International Monetary Fund.
    2. Kunieda, Takuma & Okada, Keisuke & Shibata, Akihisa, 2014. "Finance And Inequality: How Does Globalization Change Their Relationship?," Macroeconomic Dynamics, Cambridge University Press, vol. 18(5), pages 1091-1128, July.
    3. Kukenova, Madina, 2011. "Financial liberalization and allocative dfficiency of capital," Policy Research Working Paper Series 5670, The World Bank.
    4. Clements Adeyinka Akinsoyinu, 2015. "The Impact of Capital Regulation on Bank Capital and Risk Decision. Evidence for European Global Systemically Important Banks," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 5(3), pages 167-177, July.
    5. Raghuram Rajan, 2008. "Global Imbalances or why are the Poor Financing the Rich?," De Economist, Springer, vol. 156(1), pages 3-24, March.
    6. Edgar Demetrio Tovar, 2011. "Globalización financiera y sus efectos sobre el desarrollo financiero," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 29(66), pages 80-127, December.
    7. Takuma Kunieda & Keisuke Okada & Akihisa Shibata, 2016. "Corruption, Financial Development and Economic Growth: Theory and Evidence From an Instrumental Variable Approach With Human Genetic Diversity," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 45(3), pages 353-392, November.
    8. Blouin, Arthur & Ghosal, Sayantan & Mukand, Sharun W., 2025. "Globalization of capital flows and the (in)disciplining of nations," Journal of Comparative Economics, Elsevier, vol. 53(1), pages 209-226.
    9. Dam, Kaniṣka & Roy Chowdhury, Prabal, 2021. "Monitoring and incentives under multiple-bank lending: The role of collusive threats," Journal of Economic Theory, Elsevier, vol. 197(C).

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