DefinePK

Abstract

This paper empirically investigates the role of domestic bank performance in attracting cross-border bank flows to Pakistanutilizing quarterly data ranging from 2005Q4 to 2022Q4. We employ the ADF test to determine the order of integration of variables.The outcomes of the test substantiate that some variables are stationary and some are first-order integrated. Interest ratedifferential and foreign inflation are stationary at the level, while all other variables are first-order integrated. Therefore, we exploitthe ARDL bounds approach to detect the presence of cointegrating relationships among the variables. The outcomes of the testconfirm the existence of long-run relationships among the variables. Further, it is observed that the nature and magnitudes of effectsvary across lags and variables in the short run. All the lags of cross-border bank flows and domestic economic activity have positiveand significant effects, while the lags of all other variables have mixed effects in the short run. Domestic industrial production index,bank performance REER, interest rate differential, and foreign inflation boost up, while domestic inflation, stock price, and exportsdistort bank flow to Pakistan in the long run. Overall, it is confirmed that domestic economic activity and bank performance play asignificant and crucial role in attracting cross-border bank flows to Pakistan. Therefore, we recommend that domestic economicconditions, as well as banking conditions, should be improved to allure foreign bank flows to Pakistan.