Do trade and financial openness matter for financial development? Bank-level evidence from emerging market economies

Badar Nadeem Ashraf

Research in International Business and Finance, 2018, vol. 44, issue C, 434-458

Abstract: Openness theory of financial development argues that opening up a country to both international trade and financial flows can promote financial development. In this study, I test the openness theory at micro-level by examining the impact of recent rapid trade and financial openness of emerging economies on their banks’ development. I use three sets of indicators of bank development to distinguish the cost, volume and risk of bank credit. Using a panel dataset of 287 key banks from 37 emerging countries over the period 2000–2012, I find robust evidence that higher trade openness promotes bank development by increasing the volume and decreasing the cost and risk of bank credit. I identify that these results are driven, respectively, by the higher demand for finance, the domestic financial sector liberalization reforms and the lending diversification opportunities caused by the higher trade-openness. Contrary, I find that the role of financial openness for bank development is limited because though the intense credit market competition caused by the capital inflows in financially open countries urges the banks to cut the cost of credit, however it also forces them to increase risk-taking despite the lower volume of credit extended. In such a scenario, the costs associated with higher bank risk-taking might outweigh the benefits associated with the lower cost of bank credit.

Keywords: Trade openness; Financial openness; Bank risk-taking; Bank net interest margins; Bank lending (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (48)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0275531917301101
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:44:y:2018:i:c:p:434-458

DOI: 10.1016/j.ribaf.2017.07.115

Access Statistics for this article

Research in International Business and Finance is currently edited by T. Lagoarde Segot

More articles in Research in International Business and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().