Threshold effect of economic openness on bank risk-taking: Evidence from emerging markets |
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| Institution: | 1. ISCTE Business School, Instituto Universitário de Lisboa, Portugal;2. Caixa Geral de Depósitos, Portugal;3. Università degli Studi del Molise, Italy;1. Research Institute of Economics and Management, Collaborative Innovation Center of Financial Security, Southwestern University of Finance and Economics, Chengdu, China;2. Research Institute of Economics and Management, Southwestern University of Finance and Economics, Chengdu, China;3. School of Economics, Bennett S. LeBow College of Business, Drexel University, 33rd and Market Streets, Philadelphia, PA 19104, USA;1. Leeds University Business School, University of Leeds, Leeds LS2 9JT, United Kingdom;2. Nottingham University Business School China, University of Nottingham Ningbo China, 199 Taikang East Road, Ningbo, 315100, China |
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| Abstract: | This paper investigates the non-linear effects of two aspects of economic openness, namely, trade openness and financial openness, on banking system stability. We use a panel of 42 emerging markets from 2000 to 2014 to test whether bank risk-taking behaviour varies with the level of openness. We find that a higher degree of trade openness promotes bank stability linearly. Conversely, the non-linear effect of financial openness on bank risk-taking is evident. When the financial system is not sufficiently open, the impact of financial openness on bank stability is insignificant. However, as the domestic financial market becomes more open, financial openness can help discipline the behaviour of banks, making them more stable. We also find evidence that these effects are transmitted through the market discipline channel. Our findings highlight the importance of strengthening the domestic regulatory framework and transparency as the economy becomes more integrated. |
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| Keywords: | Financial openness Trade openness Panel smooth transition regression Bank risk-taking G21 F30 G38 |
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