nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2008‒02‒16
two papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Indebtedness, macroeconomic conditions and banks’ loan losses: evidence from Italy By Simona Castellani; Chiara Pederzoli; Costanza Torricelli
  2. Finance-Openness Nexus and Financial Institutions: A Case of Pakistan By Shahbaz Akmal, Muhammad; Naveed, Aamir

  1. By: Simona Castellani; Chiara Pederzoli; Costanza Torricelli
    Abstract: The Basel II capital accord has fostered the debate over the financial stability of the aggregate banking sector. There is a large empirical literature focused on the effects of macroeconomic disturbances on the banking system. Specifically, loan losses are an important factor for the banking stability and a stream of research in this field aims to identify explanatory variables for this critical indicator. This paper focuses on Italian banks data over the period 1990-2007 and investigates the relationship between the ratio of non-performing loans to total loans, the business cycle and firms’ indebtedness so as to test the impact of both real and financial fragility on banks’ default losses. We use a regression model with an interaction term representing the joint effect of real and financial fragility, which to our knowledge has never been applied before to Italian default data. The results show that the impact of financial fragility on default losses is enhanced by adverse economic conditions.
    Keywords: default; GDP; financial fragility
    JEL: G21 E44
    Date: 2008–01
  2. By: Shahbaz Akmal, Muhammad; Naveed, Aamir
    Abstract: There is scantiness of empirical research on the specific relationship between financial institutions, capital account liberalization and trade-openness but there is no particular study in the case of Pakistan. This study investigates the importance of financial institutions, net financial capital inflows and trade-openness for financial sector’s development in a small developing economy like Pakistan. Further, it also examines the hypothesis (Zingales and Rajan, 2003), predicts combined influence of capital account liberalization and trade openness on financial sector’s efficiency but insignificant. We employed three approaches (Johansen Test, DOLS and ARDL bounds testing) for the robustness of long run relationships among the variables utilizing the annual data for the period 1971-2006. We found that, under the investigation of three new alternative techniques, results are robust for long run relationships in the case of Pakistan. Coefficient of net capital inflows is having positive impact on financial development in the long run but insignificant in short run. Trade openness is the main source of financial sector’s development both in long run as well as in short run. On the other hand, financial institutions and economic growth also help to improve the development of financial markets in both the periods. Finally, rise in inflation reduces the efficiency of financial markets through its detrimental channels in the economy in short run as well in long run
    Keywords: Capital Account Liberalization; Financial development; Trade Openness
    JEL: F10 F1 F43 F36
    Date: 2007–10–15

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