Cross-border Capital Inflows,Riskiness of Credit Allocation and Banking System Stability
Along with financial globalization,large and abnormal cross-border capital inflows,namely capital inflow surges,have become more frequent.Do surges in cross-border capital inflows significantly affect banking system stability?Especially,do surges have an impact on financial stability by influencing the risk-taking behavior of financial intermediaries,or does the international risk-taking channel explain the relationship between surges and banking stability?To answer these questions,we construct firm-level measures of the riskiness of credit allocation of 53 countries and regions from 1991 to 2017,and then explore empirically the effect of surges in capital inflows on the banking stability and whether this occurs through an international risk-taking channel.We show that surges in cross-border capital inflows increase the odds of banking crises,and this effect is channeled through the riskiness of credit allocation,which provides evidence.for the international risk-taking channel.These results remain robust to a series of robustness tests of alternative key indicators,different model settings and endogenous issues.After breaking down gross inflows into FDI inflows,equity inflows and debt inflows,we find that surges in FDI inflows are not significantly associated with banking crises,and both surges in equity inflows and debt inflows increase the likelihood of banking crises by enhancing the riskiness of credit allocation.In terms of heterogeneity,we find the positive effect of surges on the probability of banking crises is less pronounced for countries and regions that introduce macroprudential policies.Further analysis suggests that arise in the riskiness of credit allocation increases the likelihood of stops.Based on these research conclusions,we propose the following policy implications.First,policymakers should pay close attention to the scale of capital inflows and strengthen the monitoring and early warning of abnormal changes and stock of cross-border capital inflows.Particularly,special attention is needed to the large fluctuations of equity capital flows and debt capital flows,as well as response plans for possible abnormal cross-border capital flows and cross-market risk contagion.Second,it is important to further improve the macroprudential regulatory framework and cross-border capital inflow management system.Also,it is crucial to strengthen the role of macroprudential policies in preventing and dissolving cross-border financial risks,mitigate the impact of capital inflow surges on banking stability,and guard against systemic risks.Third,it is necessary to improve the quality of credit risk management of commercial banks.On the one hand,regulators should strengthen the risk supervision of domestic commercial banks during the large capital inflows episodes.On the other hand,commercial banks should also strengthen credit risk management during episodes of large capital inflow surges and maintain stable operation.The main contributions are as follows.First,we promote the research on the channel through which cross-border capital inflows affect financial stability from the empirical perspective,and deepen the understanding of the theoretical mechanism underlying the impact of surges in cross-border capital inflows on financial risks.Compared with the existing credit boom mechanism that attracts more attention,this paper empirically finds that international risk-taking is also an important mechanism.Especially,we find that both surges in equity inflows and debt inflows increase the possibility of banking crises through the riskiness of credit allocation channel,further enriching the mechanism linking capital inflow surges and financial instability.Second,we contribute to the literature on bank risk-taking.In this paper,we construct measures of the riskiness of credit allocation based on the corporate debt level and relative risk data,which could more intuitively and accurately measure the level of banks'active risk-taking.It enables us to provide evidence that external shocks affect banks'risk-taking behavior and lead to crises.Third,we have enriched the research on the relationship between capital inflow surges and banking crises,by examining the whole process that surges in capital inflows push up the riskiness of credit allocation,financial risk accumulation results in abrupt reversals in capital inflows,and then sudden stops occur.
Cross-border Capital InflowsAbrupt Reversals in Capital InflowsRiskness of Credit AllocationBanking Stability
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