Banking on Democracy

Private capital movements have risen in recent decades, and bank flows have been part ofthis story. Some empirical studies have analysed the political drivers of private internationalliquidity, but paradoxically very few have looked at the political economy of bank flows. Evenless research exists on the role of politics in explaining cross-border banking movements towardsemerging democracies. The present study links compiled indicators on democracy, policyuncertainty and political stability to international bank lending flows from data developed by theBIS. It provides an empirical investigation of the political economy of cross-border bank flows toemerging markets and tries to answer two questions. Do bankers tend to prefer emergingdemocracies? Do they reward democratic transitions as well as policy and political stability? Oneof the major findings is that politics do matter, and international banks tend to have politicalpreferences annual growth in bank flows usually booms in the three years following ademocratic transition, especially in Latin America.