Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/152871 
Year of Publication: 
2005
Series/Report no.: 
ECB Working Paper No. 437
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
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.
Subjects: 
banks
Capital flows
institutions
law and finance
politics
JEL: 
F34
F21
G21
K00
Document Type: 
Working Paper

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