Capital inflow liberalization and bank credit risk

Li, Kexin; Chen, Zhongfei; Andrikopoulos, Athanasios

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.

Citation

Li, K., Chen, Z., & Andrikopoulos, A. (2024). Capital inflow liberalization and bank credit risk. Journal of International Money and Finance, 142, Article 103047. https://doi.org/10.1016/j.jimonfin.2024.103047

• Journal Article Type: Article
• Acceptance Date: Feb 27, 2024
• Online Publication Date: Mar 5, 2024
• Publication Date: Apr 1, 2024
• Deposit Date: Mar 18, 2024
• Publicly Available Date: Sep 6, 2025
• Journal: Journal of International Money and Finance
• Print ISSN: 0261-5606
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 142
• Article Number: 103047
• DOI: https://doi.org/10.1016/j.jimonfin.2024.103047
• Public URL: https://hull-repository.worktribe.com/output/4591378