Financial vulnerability and the effects of financial openness on banking systems in emerging economies

Abstract

The main focus of this dissertation is on the dynamic relations between non-core funding, credit growth and soundness of banking systems in emerging markets. In addition to this, the study contributes to the literature by focusing on the effects of international capital flows on non-core financing and leverage. Forty-six countries were considered in the data collection process in line with MSCI (Morgan Stanley Capital International) emerging market and frontier market indices. In order to reach these goals, three sets of analyses were employed. First of all, a panel vector autoregression analysis was employed. The results of this analysis show that bank soundness promotes non-core funding, credit growth and risk premium in emerging markets. By contrast, bank soundness is affected inversely by private sector credits and non-core funding. In the second part of this dissertation, the effect of banking sector external liquidity access along with the financial openness level on none-core funding and growth of credits is investigated. The findings indicate a positive effect of external liquidity access on non-core funding. Findings also show that credits extended by the banking sector are enhanced by foreign asset stock. Finally, in order to test the Turkish banks’ soundness against non-core funding and leverage, CAMELS-type measures were utilized. The results show areducing effect of leverage on bank soundness in the Turkish banking system.