Financial Globalization and the Governance of Domestic Financial Intermediaries

59 Pages Posted: 13 Mar 2007

See all articles by Thierry Tressel

Thierry Tressel

International Monetary Fund (IMF) - Research Department

Thierry Verdier

Paris School of Economics (PSE); Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics; 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

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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