Openness and Potential Fragility of the Global Banking System

This study investigates whether risk of bank default intensifies with globalization and what are the driving forces behind such escalation. A balanced panel of sixty-four countries for 1996–2017 is formed, and countries are grouped according to their business freedom, investment freedom and financial freedom rankings. System GMM estimation is employed at different stages of openness to identify whether factors such as efficiency and depth of banking and other financial institutions, market concentration and market power of banks, stock market development, foreign market participation risks, people’s perception of corruption and real GDP per capita could affect such risks. Banks appears less fragile where deregulations come with free investment and business opportunities. Fragility escalates with weaker financial sector interlinkages, ill-managed global market risk and in the absence of factors that could facilitate efficient functioning of banking system. Growth and transparency at governmental level improve bank stability but only in countries that operate at moderate levels of openness, growth and transparency. The study asserts that the efficiency of minimally regulated market may still be maintained if global market risks are managed efficiently. As factors affecting fragility vary with openness, justification for adopting a common system of banking regulations across the globe might be questioned.