INTERNATIONAL FINANCIAL INTEGRATION AND FINANCIAL SOUNDNESS IN EMERGING AND DEVELOPING ECONOMIES

In this paper, we analyze the effect of international financial integration on financial soundness in emerging and developing economies. To measure financial soundness, we use Financial Soundness Indicators (FSIs) developed by the International Monetary Fund (IMF) with aim of assessing strengths and vulnerabilities of financial systems. To estimate financial soundness, we use a panel dataset of emerging and developing economies from six regions of the world over the period 2000-2010. We use the Generalized Least Squares Method for panel estimation. The results show that the degree of international financial integration increases financial soundness of emerging and developing economies. We also examine the effect of the interaction between international financial integration and crisis on financial soundness. We find that our results are not confirmed in crisis situation.