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Financial Globalization and the Governance of Domestic Financial Intermediaries

Author/Editor: Tressel, Thierry | Verdier, Thierry
Authorized for Distribution: March 1, 2007
Electronic Access: Free Full Text (PDF file size is 1,022KB)
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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.
 
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Series: Working Paper No. 07/47
Subject(s): Globalization | Governance | Banking
Author's keyword(s): Financial globalization | domestic banks | collusion | bailout guarantees
 
English  
    Published:   March 1, 2007        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA2007047   Pages:   57
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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