Financial integration and banking stability: A post-global crisis assessment

Abstract

The impact of financial openness on banking stability is complex, with debate on its benefits and drawbacks. Theoretical literature suggests a positive relationship between financial openness and growth, development, and stability, but empirical studies reveal conflicting evidence. This paper examines these contradictions by analyzing data from 58 countries between 2010 and 2020. Using various measures for financial openness and stability, and a double debiased machine learning (DDML) model to control for confounders, we find that financial openness generally enhances banking stability, evidenced by lower nonperforming loan ratios, higher capital adequacy ratios, and increased bank liquidity. However, receptiveness to capital inflows heightens financial vulnerability. Policy implications suggest deeper integration with global markets promotes stability without harming bank profitability, advising against prolonged use of macroprudential policies which hinder development. Our results emphasize careful proxy selection for financial openness and stability, advocating sophisticated techniques like DDML to uncover direct effects.