Capital inflow liberalization and bank credit risk

Kexin Li, Zhongfei Chen and Athanasios Andrikopoulos

Journal of International Money and Finance, 2024, vol. 142, issue C

Abstract: Using a panel of annual data, covering 2207 banks operating in 45 emerging, and developing economies, over the period of 2009–2020, we study the impact of liberalization on capital inflows. Our results indicate that capital inflow liberalization has a robust and positive impact on bank credit risk, as measured by non-performing loans. Upon further examination, we find that the positive effect is more pronounced when bond, money, and financial credit markets, which broaden firms’ financing channels, are liberalized. The liberalization intensifies competition and risk appetite among banks, leading to increased credit risk. The findings suggest that openness reduces banks’ credit growth while improving non-interest income. As expected, this positive effect is mitigated within large and competitive banks, and banks with more assets. Furthermore, we find that tightening macroprudential policies, especially countercyclical capital buffers, can help moderate the positive impact of capital inflow liberalization on bank credit risk.

Keywords: Bank credit risk; Capital inflow liberalization; Competition; Macroprudential policies (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:142:y:2024:i:c:s0261560624000342

DOI: 10.1016/j.jimonfin.2024.103047

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