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What drives international bank flows? Politics, institutions and other determinants

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  • Papaioannou, Elias

Abstract

This paper uses a large panel of bilateral bank flow data to assess how institutions and politics affect international capital -bank in particular- flows. The following key findings emerge: 1) The empirical "gravity" model is the benchmark in explaining the volume of international banking activities. 2) Conditioned on standard gravity factors (distance, GDP, population), well-functioning institutions are a key driving force for international bank flows. Specifically, foreign banks invest substantially more in countries with i) uncorrupt bureaucracies, ii) high-quality legal system, and iii) a non-government controlled banking system. 3) Beyond institutions, politics exert also a firstorder impact. 4) The European Integration process has spurred cross-border banking activities between member states. These results are robust to various econometric methodologies, samples and the potential endogeneity of institutional characteristics. The strong institutions/politics-bank flows nexus has strong implications for asset trade and international macro theories, which have not modelled these relationships explicitly. JEL Classification: F34, F21, G21, K00

Suggested Citation

  • Papaioannou, Elias, 2005. "What drives international bank flows? Politics, institutions and other determinants," Working Paper Series 437, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2005437
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp437.pdf
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    Cited by:

    1. Roberto A. De Santis, 2010. "The Geography of International Portfolio Flows, International CAPM, and the Role of Monetary Policy Frameworks," International Journal of Central Banking, International Journal of Central Banking, vol. 6(2), pages 147-197, June.
    2. repec:onb:oenbwp:y::i:114:b:1 is not listed on IDEAS
    3. De Santis, Roberto A. & Gérard, Bruno, 2006. "Financial integration, international portfolio choice and the European Monetary Union," Working Paper Series 626, European Central Bank.
    4. Barry Eichengreen & Pipat Luengnaruemitchai, 2008. "Bond Markets as Conduits for Capital Flows: How Does Asia Compare?," NBER Chapters, in: International Financial Issues in the Pacific Rim: Global Imbalances, Financial Liberalization, and Exchange Rate Policy, pages 267-313, National Bureau of Economic Research, Inc.
    5. Böwer, Uwe & Guillemineau, Catherine, 2006. "Determinants of business cycle synchronisation across euro area countries," Working Paper Series 587, European Central Bank.
    6. Das, Udaibir S. & Papaioannou, Michael G. & Trebesch, Christoph, . "Sovereign Default Risk and Private Sector Access to Capital in Emerging Markets," Chapters in Economics,, University of Munich, Department of Economics.
    7. Ghosh,Swati R. & Sugawara,Naotaka & Zalduendo,Juan F., 2011. "Banking flows and financial crisis -- financial interconnectedness and basel III effects," Policy Research Working Paper Series 5769, The World Bank.
    8. Jamel Boukhatem, 2009. "Essai sur les déterminants empiriques de développement des marchés obligataires," EconomiX Working Papers 2009-32, University of Paris Nanterre, EconomiX.
    9. Roxana Badîrcea & Alina Manta & Ramona Pîrvu & Nicoleta Florea, 2016. "Banking Integration in European Context," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 18(42), pages 317-317, May.
    10. Nestmann, Thorsten, 2005. "German bank lending to industrial and non-industrial countries: driven by fundamentals or different treatment?," Discussion Paper Series 2: Banking and Financial Studies 2005,08, Deutsche Bundesbank.
    11. Siwińska-Gorzelak, Joanna, 2024. "The impact of fiscal rules on cross-border bank claims," International Review of Financial Analysis, Elsevier, vol. 91(C).
    12. Eichler, Stefan & Littke, Helge C.N. & Tonzer, Lena, 2017. "Central bank transparency and cross-border banking," Journal of International Money and Finance, Elsevier, vol. 74(C), pages 1-30.
    13. Pérez, Francisco & Arribas, Iván & Tortosa-Ausina, Emili, 2009. "Openness and geographic neutrality: How do they contribute to international banking integration?," MPRA Paper 17211, University Library of Munich, Germany.
    14. Patrick McGuire & Nikola Tarashev, 2008. "Bank health and lending to emerging markets," BIS Quarterly Review, Bank for International Settlements, December.
    15. Daude, Christian & Fratzscher, Marcel, 2008. "The pecking order of cross-border investment," Journal of International Economics, Elsevier, vol. 74(1), pages 94-119, January.
    16. Wu, Ji & Jeon, Bang Nam & Luca, Alina C., 2010. "Does Distance Affect the Performance of Foreign Banks? Evidence from Multinational Banking in Developing Countries," MPRA Paper 37083, University Library of Munich, Germany, revised 01 Feb 2012.
    17. Kapingura Forget Mingiri & S.I Ikhide & A Tsegaye, 2016. "The Relationship between External Financial Flows and Economic Growth in the Southern African Development Community (SADC): The Role of Institutions," Journal of Economics and Behavioral Studies, AMH International, vol. 8(1), pages 87-103.
    18. Elitza Mileva, 2013. "Voluntary private sector involvement and the financial crisis in emerging Europe," Applied Economics Letters, Taylor & Francis Journals, vol. 20(6), pages 596-600, April.
    19. repec:cte:whrepe:wh056807 is not listed on IDEAS
    20. Wei, Shang-Jin, 2006. "Connecting two views on financial globalization: Can we make further progress?," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 459-481, December.
    21. Arie L Melnik & Steven E. Plaut, 2007. "The Institutional Structure and the Cost of Bank Loans: an International Comparison," ICER Working Papers 22-2007, ICER - International Centre for Economic Research.

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    More about this item

    Keywords

    banks; capital flows; institutions; law and finance; politics;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • K00 - Law and Economics - - General - - - General (including Data Sources and Description)

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