Financial Globalization and the Governance of Domestic Financial Intermediaries

March 1, 2007

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Thierry Tressel, and Thierry Verdier. Financial Globalization and the Governance of Domestic Financial Intermediaries, (USA: International Monetary Fund, 2007) accessed September 18, 2024

Disclaimer: 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

Summary

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.

Subject: Bank credit, Banking, Foreign banks, Foreign direct investment, Self-employment

Keywords: Mover accent, WP

Publication Details

Pages:

57
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2007/047
Stock No:

WPIEA2007047
ISBN:

9781451866117
ISSN:

1018-5941

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