International bank flows to emerging markets: influence of sovereign credit ratings and their regional spillover effects

We examine whether changes in sovereign credit assessments help determine international bank flows to emerging countries. We focus on the bank flows of G7 countries to a sample of 55 emerging market borrowers for 1995–2008. We find evidence indicating that sovereign credit rating revisions have significant and positive influences on international bank flows from developed markets even after controlling for other determinants. In addition, we find strong regional rating spillover effects. Ratings improvements in one emerging market region tend to reduce bank flows to the other regions. However, there is an exception from the Asia Pacific to Eastern Europe.