The Effects of Financial Liberalization on Private Bank Credit in Emerging Market Countries

Abstract

This paper analyzes the effects of large liberalizing changes in regulatory policies, specifically directed credits, reserve requirements, capital controls, and an overall financial reform index developed by Detragiache et al., on private bank credit in emerging market economies. Using a panel event study approach which satisfies the parallel trends assumption, this paper finds that large changes in directed credit and reserve requirement policies significantly increase the amount of credit in the economy, with the effects on reserve requirements persistent for up to five years after the change. In addition, large changes in the financial reform index, which serves as a proxy for the overall regulatory environment, also significantly increases the amount of credit in the economy. However, results from a causal forest analysis suggest that, for changes in reserve requirement policies, the treatment effect is not homogenous across sectors, with energy, real estate, and utilities companies seeing a significantly smaller effect in the credit increases.