The impact of trade openness on the cost of financial intermediation and bank performance: evidence from BRICS countries

Abstract

PurposeThe purpose of this paper is to examine the impact of trade openness on the cost of financial intermediation and bank performance. Developed and developing countries are currently pursuing trade openness to achieve higher bank performance with less intermediation costs.Design/methodology/approachIn attaining the study's objectives, several regression methodologies were employed (i.e. system generalized method of moments (GMM), fixed effect, pooled ordinary least squares (OLS) and vector error correction model (VECM)). The authors tested the hypothesis on data of 885 banks from BRICS countries, which span 18 years (2000–2017).FindingsThe results from this robust study showed that embedding higher trade openness reduces financial intermediation costs and improves banks' performance. The results remain robust following the use of different estimation methods and alternative variables as proxies. In addition, results were still valid upon considering bank level, industry level and country level as control variables. It was also observed that the relation pattern holds its rigidity during “good” and “bad” times (i.e. the global financial crisis).Originality/valueThe results provide better references for bank regulators, academics and policymakers to take advantage of the low financial intermediation costs resulting from trade openness.

The effect of taxation on sustainable development goals: evidence from emerging countries

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“… ( Jahnsen and Pomerleau, 2017 ; Lee and Gordon, 2005 ) Effective Tax Rate ETR ETR indicates composite effective average tax rate of each country at each year ( Ferede and Dahlby, 2012 ; Heimberger, 2021 ; Widmalm, 2001 ) Macroeconomic Variable GDP Growth GR GDP growth rate of each country at each year. ( Hussain et al., 2021 ; Rahman et al., 2021 ; Romer and Romer, 2010 ) Inflation INF The inflation rate of each country at each year Country-level Variable Financial Development FD The financial development index is a broad measure for financial development by taking into account its efficiency, accessibility, and depth. It takes value from each country at each year.…”

“… ( Busch et al., 2015 ; Rahman et al., 2021 ; Shevlin et al., 2019 ) Financial Openness FOP KAOPEN (The Chinn-Ito Index) index measures constraints on capital and current account transactions, the requirement for the surrender of export proceeds, and the presence of multiple exchange rates. The index ranges from 0 to 1, where a higher value indicates more financial openness ( Hussain et al., 2021 ; Rahman et al., 2021 ; Romer and Romer, 2010 ) Political Stability PSI The political stability index reflects the possibility of politically-motivated violence, including terrorism. Variable ranges from −2.5 to 2.5, with higher values indicating more political stability ( Rahman et al., 2021 ; Yakubu et al., 2021 ) Source: Developed by the authors.…”

“…The index ranges from 0 to 1, where a higher value indicates more financial openness ( Hussain et al., 2021 ; Rahman et al., 2021 ; Romer and Romer, 2010 ) Political Stability PSI The political stability index reflects the possibility of politically-motivated violence, including terrorism. Variable ranges from −2.5 to 2.5, with higher values indicating more political stability ( Rahman et al., 2021 ; Yakubu et al., 2021 ) Source: Developed by the authors. …”

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