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Financial Globalization and the Governance of Domestic Financial Intermediaries

59 Pages Posted: 13 Mar 2007  

Thierry Tressel

International Monetary Fund (IMF) - Research Department

Thierry Verdier

Paris School of Economics (PSE); Delta - Ecole Normale Superieure (ENS); Centre for Economic Policy Research (CEPR)

Date Written: March 2007

Abstract

We model an economy in which domestic banks and firms face incentive constraints, as in Holmstrom and Tirole (1997). Firms borrow from banks and uninformed investors, and can collude with banks to reduce the intensity of monitoring. We study the general equilibrium effects of capital flows (portfolio investments and loans, FDI) on the governance of domestic banks. We find that liberalization of capital flows may deteriorate the governance of the domestic financial system by increasing firms' incentives to collude with banks, with negative effects on productivity. We also show that systemic bailout guarantees increase the risks of collusion.

Keywords: Globalization, Governance, Banking

JEL Classification: F3, F43, G21, O16, O42

Suggested Citation

Tressel, Thierry and Verdier, Thierry, Financial Globalization and the Governance of Domestic Financial Intermediaries (March 2007). IMF Working Papers, Vol. , pp. 1-57, 2007. Available at SSRN: https://ssrn.com/abstract=969861

Thierry Tressel (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Thierry Verdier

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014
France

Delta - Ecole Normale Superieure (ENS) ( email )

48, Boulevard Jourdan
75014 Paris
France
+33 1 4313 6308 (Phone)
+33 1 4313 6310 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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