Financial Globalization and the Governance of Domestic Financial Intermediaries

Abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.We model an economy in which domestic banks and firms face incentive constraints, as in Holmstrom and Tirole (1997). Firms borrow from banks and uninformed investors, and can collude with banks to reduce the intensity of monitoring. We study the general equilibrium effects of capital flows (portfolio investments and loans, FDI) on the governance of domestic banks. We find that liberalization of capital flows may deteriorate the governance of the domestic financial system by increasing firms' incentives to collude with banks, with negative effects on productivity. We also show that systemic bailout guarantees increase the risks of collusion. JEL Classification Numbers: F3, F43, G21, G32, O16, O43

Corruption, Financial Development and Economic Growth: Theory and Evidence From an Instrumental Variable Approach With Human Genetic Diversity

“…() investigating bureaucratic corruption in the manufacturing sector, our model departs from their model in that bureaucratic corruption in the financial sector is also taken into account. Tressel and Verdier () also consider corruption in the financial sector and obtain the conditions under which the governance of the domestic financial system is more likely to be corrupted after capital account liberalization by collusion between firms and bankers. In contrast with their model, in which bankers are corrupt, corrupt bureaucrats demand bribes from financial intermediaries in our model.…”

Optimal Prudential Regulation of Banks and the Political Economy of Supervision

“…We consider a single good economy with four types of risk neutral agents, with unit mass each: (a) investors, who supply capital elastically; (b) bankers who have the ability to monitor borrowers; (c) entrepreneurs who have investment opportunities and are endowed with an aggregate capital stock normalized to one; and (d) a banking supervisor who audits banks and enforces regulations. Both bankers and entrepreneurs'actions are subject to moral hazard as in Holmstrom and Tirole (1997) and Tressel and Verdier (2011).…”

Foreign Capital and Economic Growth

“…By contrast, they find no adverse effects of foreign bank presence in more advanced countries. Tressel and Verdier (2007) show that, in countries with weak institutions, financial integration leads to greater investment by politically connected firms, with a loss of efficiency. Our findings are not inconsistent with these results.…”