Do Global Capital Inflows Affect Banking Sectors' Profitability? Evidence from EM-20 Emerging Economies

Abstract

This paper analysed a sample of countries currently recognized as the top 20 emerging economies (EM-20), to investigate the effects of Global Capital Inflows (GCI) on their banking sectors’profitabilities over the 1998-2018 period. Studies showed that these movements of capital had positive, negative or null effects on the general economy in host countries. But what is unknown is their effects on the different sectors-of-activities that compose the general-economy. The reason of selecting the banking sector was to point out whether this sector played a contributory-moderating role or rather a brake over the period considered. The Fixed-Effect/Random Effect Models, and Robust-Least-Squares were applied. As main findings, over the 1998-2008 period only two components, but over 2009-2018, Foreign-Direct-Investments, Foreign-Portfolio-Investments, External-Short-Term-Debts, and Remittances had positive effects on banking sectors'profitabilities (ROA and ROE) in EM-20 countries. The dynamic analysis shows that for the FDI, FPI and REM, the magnitudes of the effects were less intense before the crisis than after; while for ESTDBT, it was the inverse. Among the control variables, those which had positive effects were the Economic-growth, Inflation, and Interest rate, while Exchange rate showed negative effects. The results highlighted the contributory-moderating role of banking sector on the GCI-∆GDP relationship in EM-20.

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