Financial openness, liability composition of banks, and bank risk: International evidence

Employing a panel dataset encompassing 4,412 banks from 87 countries from 1990 to 2020, we apply the autoregressive distributed lag (ARDL) model to investigate the relationship between financial openness, banks’ liability composition, and bank risk. Our findings reveal that financial openness can directly lead to an increase in bank risk in the short term but a reduction in bank risk over the long term. Additionally, we identify the composition of bank liabilities as a novel channel between financial openness and bank risk. Specifically, in the short term, financial openness amplifies bank risk through an escalation in the ratio of short-term liabilities juxtaposed with a decrease in the ratio of long-term liabilities. Conversely, in the long term, financial openness diminishes bank risk by diminishing short-term liabilities’ ratios while concurrently enhancing the proportions of long-term liabilities. Furthermore, it is noted that the direct effects of financial openness on banking risk, whether short- or long-term, may exhibit heterogeneity across different periods, country development levels, and types of capital flow.