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

Elias Papaioannou

No 437, Working Paper Series from European Central Bank

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

Keywords: banks; capital flows; institutions; law and finance; politics (search for similar items in EconPapers)
Date: 2005-02
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Citations: View citations in EconPapers (24)

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