How does institutional development shape bank risk-taking incentives in the context of financial openness?

This paper investigates the role of institutional development on the relationship between financial openness and bank risk-taking behavior. In particular, we investigate how institutional improvement can change the impact of financial openness on bank stability. Using a panel of 37 emerging markets...

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Bibliographic Details
Published in:Pacific-Basin finance journal 2019-12, Vol.58, p.101209, Article 101209
Main Authors: Bui, Duy Tung, Bui, Thi Mai Hoai
Format: Article
Language:English
Subjects:
Bank risk-taking
Financial openness
Institutional development
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Summary:This paper investigates the role of institutional development on the relationship between financial openness and bank risk-taking behavior. In particular, we investigate how institutional improvement can change the impact of financial openness on bank stability. Using a panel of 37 emerging markets and 21 advanced economies over the period 2000–2015, the results show that opening the financial market affects bank risk-taking behaviors differently, depending on the degree of institutional development. Empirical evidence also supports the competition-fragility view in the case of developing countries, while it favors the competition-stability hypothesis in developed economies. •Higher financial openness and better institutional quality contribute to stronger financial stability.•Impact of financial openness on bank risk-taking depends on institutional development.•These effects are different in developed and developing countries.
ISSN:0927-538X
1879-0585
DOI:10.1016/j.pacfin.2019.101209