Banking System, International Investors and Central Bank Policy in Everging Markets

Working Papers from Banca Italia - Servizio di Studi

Abstract: This paper argues that the liberalization of capital inflows in a small open economy with a financial system dominated by banks may provoke a soft budget constraint distortion, because large amounts of funds become available at relatively low cost. International investors internalize the risk of accumulation of losses by the banking system only when the risk premium is sufficienly high so as to detemine a positive probability that banks will default. This wxplains why crises occur when massive losses have already been accumulated.

Keywords: BANKS; INTERNATIONAL INVESTMENTS; MARKET (search for similar items in EconPapers)
JEL-codes: F21 G21 (search for similar items in EconPapers)
Date: 2000

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Working Paper: Banking System, International Investors and Central Bank Policy in Emerging Markets (2000)
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