Causes and Consequences of International Bank Flows

51 Pages Posted: 7 Aug 2009

See all articles by Joel F. Houston

Joel F. Houston

University of Florida - Department of Finance, Insurance and Real Estate

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Yue Ma

City University of Hong Kong (CityUHK) - Department of Economics & Finance

Date Written: August 3, 2009

Abstract

We investigate the factors influencing international bank flows from 26 source countries to 120 recipient countries over the past two decades and consider the implications of these flows. Controlling for other factors, we find that the bank flows are positively related to the quality of institutions such as the level of creditor rights protection, the level of property right protection, and the level of information sharing within the recipient country, and that geographical and cultural differences between countries limit the flow of bank capital. Additionally, we consider whether cross-country differences in regulations affect the flow of capital. Using the world-wide bank regulation datasets compiled by Barth, Caprio and Levine (2008), we find evidence suggesting that a type of “regulatory arbitrage” takes place, where banks are more likely to transfer funds to markets with fewer banking regulations. In one positive respect, our results indicate that countries can help obtain foreign capital by establishing strong protection for creditors and limited regulation. At the same time, the existence of regulatory arbitrage raises the concerns posted by Acharya, Wachtel, and Walter (2009), and reinforces the need for global coordination in banking regulation. Finally, we present evidence suggesting that international bank flows help reduce external financing constraints among borrowing firms. These results are more pronounced for smaller firms in less developed countries.

Keywords: International Bank Flow, Institutional Distance, Regulatory Arbitrage

JEL Classification: G21, G28, G30

Suggested Citation

Houston, Joel F. and Lin, Chen and Ma, Yue, Causes and Consequences of International Bank Flows (August 3, 2009). Available at SSRN: https://ssrn.com/abstract=1443520 or http://dx.doi.org/10.2139/ssrn.1443520

Joel F. Houston (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Yue Ma

City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

HOME PAGE: http://www.cb.cityu.edu.hk/staff/yuema24

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