BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 3/2011:
The determinants of cross-border bank flows to emerging markets: New empirical evidence on the spread of financial crises
Sabine Herrmann ()
and Dubravko Mihaljek
Abstract: This paper studies the nature of spillover effects in bank
lending flows from advanced to the emerging market economies and identifies
specific channels through which such effects occur. We examine a panel data
set of cross-border bank flows from 17 advanced to 28 emerging market
economies in Asia, Latin America and central and eastern Europe from 1993
to 2008. Our empirical framework is based on a gravity model of financial
flows. We augment this model with global, lender and borrower country risk
factors, as well as financial and monetary integration variables. The
empirical analysis suggests that global as well as country specific factors
are significant determinants of cross-border bank flows. Greater global
risk aversion and expected financial market volatility have been the most
important factors behind the decrease in cross-border bank flows during the
crisis of 2007–08. The decrease in cross-border loans to central and
eastern Europe was more limited compared to Asia and Latin America, in
large measure because of the higher degree of financial and monetary
integration in Europe, and relatively sound banking systems in the region.
These results are robust to various specification, sub-samples and
econometric methodologies.
Keywords: gravity model; cross-border bank flows; financial crises; emerging market economies; spillover effects; panel data; (follow links to similar papers)
JEL-Codes: C23; F34; F36; G01; O57; (follow links to similar papers)
48 pages, April 5, 2011
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