International Financial Integration and Funding Risks: Bank-Level Evidence from Latin America

43 Pages Posted: 1 Dec 2017

See all articles by Luis Catão

Luis Catão

International Monetary Fund (IMF)

Valeriya Dinger

Universität Osnabrück

Daniel Marcel te Kaat

Universität Osnabrück

Date Written: October 2017

Abstract

Using a sample of over 700 banks in Latin America, we show that international financial liberalization lowers bank capital ratios and increases the shares of short-term funding. Following liberalization, large banks substitute interbank borrowing for equity and long-term funding, whereas small banks increase the proportions of retail funding in their liabilities, which have been particularly vulnerable to flight-to-quality during periods of financial distress in much of Latin America. We also find evidence that riskier bank funding in the aftermath of financial liberalizations is exacerbated by asymmetric information, which rises on geographical distance and the opacity of balance sheets.

Keywords: Bank Capital Structure, Financial Liberalization, International Capital Flows, Financial Aspects of Economic Integration

JEL Classification: F32, F36, G21

Suggested Citation

Catão, Luis and Dinger, Valeriya and Marcel te Kaat, Daniel, International Financial Integration and Funding Risks: Bank-Level Evidence from Latin America (October 2017). IMF Working Paper No. 17/224, Available at SSRN: https://ssrn.com/abstract=3079548

Luis Catão (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Valeriya Dinger

Universität Osnabrück ( email )

Neuer Graben
Osnabrück, 49074
Germany

Daniel Marcel te Kaat

Universität Osnabrück ( email )

Neuer Graben
Osnabrück, 49074
Germany

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