Cross-Border Bank Flows and Systemic Risk.

This article investigates the relationship between cross-border bank flows and systemic risk in target countries' banking systems, focusing on whether such flows enhance or undermine financial stability. Using granular bilateral bank claims data from the Bank for International Settlements (BIS) for 86 countries over 1995–2018 and employing a granular instrumental variable (GIV) approach to address endogeneity, the study finds that increased cross-border bank flows are associated with significant reductions in systemic risk. This risk reduction is particularly pronounced for flows originating from source countries with stronger regulatory stringency than the target country, a pattern interpreted as evidence against the harmful view of regulatory arbitrage. Additionally, these flows correlate with improvements in banking sector profitability, asset quality, and efficiency, and the effects are robust across various systemic risk measures and persist even during financial crises such as the European sovereign debt crisis. The study also finds that differences in economic development, creditor rights, or foreign bank presence in the target country do not significantly alter these relationships.