Liberalization and Banking Crises: The Role of Capital Inflows and Lack of Transparency

42 Pages Posted: 14 Jun 2004

See all articles by Mariassunta Giannetti

Mariassunta Giannetti

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Date Written: April 2005

Abstract

Previous literature has stressed that financial liberalizations may cause banking crises because they spur competition. I show that also another aspect of financial liberalization may be important for bank stability in emerging markets: the liberalization of capital inflows. After financial liberalization, international investors initially provide large amounts of funds at low cost, if they have incomplete information on the quality of bank assets. This enables insolvent banks to accumulate bad loans. In equilibrium, investors rationally stop funding domestic banks and bank defaults occur only after a substantial amount of losses has been accumulated.

Keywords: Banking crises, Capital inflows, Transparency, Capital requirements

JEL Classification: G21, G28, F34

Suggested Citation

Giannetti, Mariassunta, Liberalization and Banking Crises: The Role of Capital Inflows and Lack of Transparency (April 2005). Available at SSRN: https://ssrn.com/abstract=556072 or http://dx.doi.org/10.2139/ssrn.556072

Mariassunta Giannetti (Contact Author)

Stockholm School of Economics ( email )

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