Cross-Border Banking, International Financial Flows and Financial Deepening

Abstract

The study evaluates the significance of cross-border banking and international financial flows in enhancing financial deepening in the Southern African Development Community (SADC), including isolating the impact of regional, or pan-African, banks. The study also attempts to estimate the responses of the domestic financial sector to shocks in foreign banks and financial flows. Dynamic panel and general method of moments (GMM) estimations established that cross-border bank slows down development of domestic financial markets, although there are traces of positive effects in some measures. Pan-African Banks support credit development in domestic markets although diluting profitability. Impulse response and variance decomposition shows a largely negative reaction of domestic financial markets to shocks in foreign banks and financial flows in the short run, with the reaction turning positive in the long run. Indicatively, the results are demonstrating limited, but positive, financial spill-overs effects of foreign banks on financial development of other SADC countries. PanAfrican Banks are still to have a significant impact in the SADC countries.