nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2021‒05‒17
34 papers chosen by
Georg Man

  1. Slow recoveries, endogenous growth and macroprudential policy By Bonciani, Dario; Gauthier, David; Kanngiesser, Derrick
  2. Financial reforms and innovation: a micro-macro perspective By Boikos, Spyridon; Bournakis, Ioannis; Christopoulos, Dimitris; McAdam, Peter
  3. Banks, Political Capital, and Growth By Lambert, Thomas; Wagner, Wolf; Zhang, Eden Quxian
  4. The financial inclusion agenda: Examining the role of conventional banks in deepening access to formal credit By Abdul Malik Iddrisu; Michael Danquah
  5. The Impact of Foreign Direct Investment on Innovation: Evidence from Patent Fillings and Citations in China By Chen, Yongmin; Jiang, Haiwei; Liang, Yousha; Pan, Shiyuan
  6. Effect of Development Aid on Productive Capacities By Gnangnon, Sèna Kimm
  7. How to Allocate New External Finance to African Countries? The vulnerability challenge. A note prepared in view of the Paris Summit on Financing African Economies. By Patrick Guillaumont; Sylviane Guillaumont Jeanneney; Laurent Wagner
  8. Bewley Banks By Jamilov, Rustam; Monacelli, Tommaso
  9. The real effects of financial uncertainty shocks: A daily identification approach By Piergiorgio Alessandri; Andrea Gazzani; Alejandro Vicondoa
  10. News Shocks under Financial Frictions By Christoph Gortz; John Tsoukalas; Francesco Zanetti
  11. State-dependent fiscal multipliers and financial dynamics: An impulse response analysis by local projections for South Africa By Serena Merrino
  12. GSIB status and corporate lending: An international analysis By Degryse, Hans; Mariathasan, Mike; Tang, Thi Hien
  13. Credit Constraints, Labor Productivity and the Role of Regional Institutions: Evidence from Manufacturing Firms in Europe By Brezzi, Monica; Ganau, Roberto; Maslauskaite, Kristina; Rodríguez-Pose, Andrés
  14. Firms' resilience to financial constraints: The role of trade credit By Isaac Marcelin; Daniel Brink; Wei Sun
  15. All You Need Is Cash: Corporate Cash Holdings and Investment after the Global Financial Crisis By Andreas Joseph; Christiane Kneer; Neeltje van Horen
  16. Globalisation and the efficiency-equity trade-off By Beck, Roland; Di Nino, Virginia; Stracca, Livio
  17. Why Does Capital Flow from Equal to Unequal Countries? By de Ferra, Sergio; Mitman, Kurt; Romei, Federica
  18. How Does International Capital Flow? By Kumhof, Michael; Rungcharoenkitkul, Phurichai; Sokol, Andrej
  19. Foreign Currency Borrowing of Corporations as Carry Trades: Evidence from India By Acharya, Viral V.; Vij, Siddharth
  20. How ETFs amplify the global financial cycle in emerging markets By Nathan Converse; Eduardo Levy Yeyati; Tomas Williams
  21. Trade Protection, Stock-Market Returns, and Welfare By Mary Amiti; Sang Hoon Kong; David Weinstein
  22. A GPS navigator to monitor risks in emerging economies: the vulnerability dashboard By Irma Alonso; Luis Molina
  23. Who Lends Before Banking Crises? Evidence from the International Syndicated Loan Market By Giannetti, Mariassunta; Jang, Yeejin
  24. Financial crisis and non-performing exposures in Greece By Hardouvelis, Gikas A.
  25. Wie ist Fintech-Innovation für die Fragilität von Banken in Afrika Südlich der Sahara (ASS) von Bedeutung? By Christian-Lambert Nguena
  26. Mobile technology supply factors and mobile money innovation: Thresholds for complementary policies By Simplice A. Asongu; Nicholas M. Odhiambo
  27. Private Equity and Financial Stability: Evidence from Failed Bank Resolution in the Crisis By Emily Johnston-Ross; Song Ma; Manju Puri
  28. Reputational risks in banks: A review of research themes, frameworks, methods, and future research directions By David Adeabah; Charles Andoh; Simplice A. Asongu; Albert Gemegah
  29. Unearthing Zombies By Nirupama Kulkarni; S.K. Ritadhi; Siddharth Vij; Katherine Waldock
  30. Work from home amenability and venture capital financing during COVID-19 By Jagriti Srivastava; Balagopal Gopalakrishnan
  31. Unintended Consequences of Unemployment Insurance Benefits: The Role of Banks By Yavuz Arslan; Ahmet Degerli; Gazi Kabaş
  32. Uncovering the mechanism(s): Financial constraints and wages By Arabzadeh, Hamzeh; Balleer, Almut; Gehrke, Britta
  33. Social Finance By Kuchler, Theresa; Ströbel, Johannes
  34. Sovereign rating methodologies, ESG and climate change risk: an overview By Denitsa Angelova; Francesco Bosello; Andrea Bigano; Silvio Giove

  1. By: Bonciani, Dario (Bank of England); Gauthier, David (Bank of England); Kanngiesser, Derrick (Bank of England)
    Abstract: Banking crises have severe short and long‑term consequences. We develop a general equilibrium model with financial frictions and endogenous growth in which macroprudential policy supports economic activity and productivity growth by strengthening bank’s resilience to adverse financial shocks. The improved intermediation capacity of a safer banking system leads to a higher steady state growth rate. The optimal bank capital ratio of 18% increases welfare by 6.7%, 14 times more than in the case without endogenous growth. When the economy enters a liquidity trap, the effects of financial disruptions and thus the benefits of macroprudential policy are even more significant.
    Keywords: Slow recoveries; endogenous growth; financial stability; macroprudential policy
    JEL: E32 E44 E52 G01 G18
    Date: 2021–04–23
  2. By: Boikos, Spyridon; Bournakis, Ioannis; Christopoulos, Dimitris; McAdam, Peter
    Abstract: We develop a horizontal R&D growth model that allows us to investigate the different channels through which financial reforms affect R&D investment and patent activity. First, a “micro” reform that abolishes barriers to entry in the banking sector produces a straightforward result: a decrease in lending rates which stimulates R&D investment and economic growth. Second, a “macro” reform that removes restrictions on banks’ reserves and credit controls. While this reform increases liquidity, it also increases the risk of default, potentially raising the cost of borrowing. This we dub the “reserves paradox” – this makes banks offset the rise in the default rate with a higher spread between loans and deposit rates. Thus our model suggests that whilst micro reforms boost innovation, macro reforms may appear negative. We test and find empirical support for these propositions using a sample of 21 OECD countries. JEL Classification: G2, C23, E44, O43
    Keywords: estimation, finance, growth, monitoring, patents, reserves paradox
    Date: 2021–05
  3. By: Lambert, Thomas; Wagner, Wolf; Zhang, Eden Quxian
    Abstract: We show that politically connected banks influence economic activity. We exploit shocks to individual banks' political capital following close US congressional elections. We find that regional output growth increases when banks active in the region experience an average positive shock to their political capital. The effect is economically large, but temporary, and is due to lower restructuring in the economy rather than increased productivity. We show that eased lending conditions (especially for riskier firms) can account for the growth effect. Our analysis is a first attempt to directly link the politics and finance literature with the finance and growth literature.
    Keywords: Campaign Contributions; close elections; corporate lending; creative destruction; economic growth; Political Connections; productivity
    JEL: D72 E65 G18 G21
    Date: 2020–12
  4. By: Abdul Malik Iddrisu; Michael Danquah
    Abstract: Using a unique district-level panel dataset, we investigate the effect of banking system penetration on financial inclusion in Ghana. To purge potential endogeneity bias in the underlying relationship, we exploit a change in the policy environment of the Ghanaian banking system to instrument for banking system penetration. We show, first, that the switch from a compartmentalized system of banking to a universal banking system in Ghana has resulted in an expansion of banks' branch networks, which has benefited hitherto financially less developed districts.
    Keywords: Banking, Financial inclusion, Access to credit, Ghana, Financial institutions, Formal credit, Panel
    Date: 2021
  5. By: Chen, Yongmin; Jiang, Haiwei; Liang, Yousha; Pan, Shiyuan
    Abstract: This paper studies how foreign direct investment (FDI) affects innovation in the host country, using matched firm-level patent data of Chinese firms. The data contain multidimensional information about patent counts and citations which, together with an identification strategy based on Lu et al. (2017), allows us to measure innovation comprehensively and to uncover the causal relationship. Our empirical analysis shows that FDI has positive intra-industry effects on the quantity and quality of innovation by Chinese firms. We show that these positive effects are driven by increases in competition, rather than by knowledge spillover from FDI which is measured by patent citations between domestic firms and foreign invested enterprises (FIEs). We further investigate the inter-industry effects of FDI and find that FDI has positive vertical effects on innovation in upstream sectors.
    Keywords: FDI; Innovation; Patent; Competition; Spillover
    JEL: F2 L5 O3
    Date: 2021–05–11
  6. By: Gnangnon, Sèna Kimm
    Abstract: The international policy discourse, for example by the World Trade Organization and the United Nations, has emphasized the critical role of productive capacities in promoting sustainable development and building economic resilience in developing countries. This paper has examined whether development aid contributes to enhancing productive capacities in recipient countries. To that effect, it considers two main components of the total official development assistance (ODA), including Aid for Trade (AfT) and NonAfT, the latter being the part of total ODA allocated to other sectors than the trade-related sectors. The analysis relies on the index of the overall productive capacities developed recently by the UNCTAD, and covers 111 countries over the period 2002-2018. The findings indicate that development aid, including its two main components contribute to fostering productive capacities in recipient countries, with AfT flows exerting a higher positive effect on productive capacities than NonAfT flows. Moreover, in Least developed countries (LDCs), the positive effect of ODA on productive capacities reflects the key role of both AfT flows and NonAfT flows in contributing to the development of productive capacities. In contrast, in NonLDCs (other countries in the full sample than LDCs), only AfT flows matter positively for the strengthening of productive capacities, as NonAfT flows do not appear to exert a significant effect on productive capacities. These outcomes highlight the criticality of development aid for enhancing productive capacities in developing countries, in particular in LDCs.
    Keywords: Development aid,Productive Capacities
    JEL: D24 O1 F35
    Date: 2021
  7. By: Patrick Guillaumont (FERDI - Fondation pour les Etudes et Recherches sur le Développement International); Sylviane Guillaumont Jeanneney (FERDI - Fondation pour les Etudes et Recherches sur le Développement International); Laurent Wagner (FERDI - Fondation pour les Etudes et Recherches sur le Développement International)
    Abstract: S'il devient possible de mobiliser des financements extérieurs importants à destination des pays africains, il faut simultanément s'interroger sur la façon dont ces flux seront répartis entre les différents pays. Les questions auxquelles le Sommet doit faire face sont à la fois celle des besoins de financement relatifs de l'Afrique et celle des besoins respectifs des différents pays africains. En effet, ces pays n'ont pas tous les mêmes besoins, ni la même capacité d'absorption.
    Date: 2021
  8. By: Jamilov, Rustam; Monacelli, Tommaso
    Abstract: We develop a non-linear, quantitative macroeconomic model with heterogeneous monopolistic financial intermediaries, incomplete markets, default risk, endogenous bank entry, and aggregate uncertainty. The model generates a bank net worth distribution fluctuation problem analogous to the canonical Bewley-Huggett-Aiyagari-Imrohoglu environment. Our framework nests Gertler-Kyiotaki (2010) and the standard Real Business Cycle model as special cases. We present four general results. First, relative to the GK benchmark, banks' balance sheet-driven recessions can be significantly amplified, depending on the interaction of endogenous credit margins, the cyclicality of a precautionary lending motive and the (counter-) cyclicality of intermediaries' idiosyncratic risk. Second, equilibrium responses to aggregate exogenous shocks depend explicitly on the conditional distributions of bank net worth and leverage, which are endogenous time-varying objects. Aggregate shocks to banks' balance sheets that hit a concentrated and fragile banking distribution cause significantly larger recessions. A persistent consolidation in the U.S. banking sector that matches the one observed over 1980-2020 generates a large economic contraction and an increase in financial instability. Third, we document, and match, novel stylized facts on both the cross-section of credit margins and the cyclical properties of the first three moments of the cross-sectional distributions of financial intermediary assets, net worth, leverage, loan margins, and default risk. We find that shocks to capital quality and to leverage constraint tightness (``financial shocks'') can match fluctuations in the U.S. financial sector very well. Finally, we use the model to identify and characterize episodes of systemic banking crises. Such events are associated with large economic recessions, spikes in bank leverage, and large drops in the number of intermediaries.
    Keywords: Aggregate fluctuations; financial intermediaries; Heterogeneity; incomplete markets; monopolistic competition
    JEL: E32 E44
    Date: 2020–11
  9. By: Piergiorgio Alessandri (Bank of Italy); Andrea Gazzani (Bank of Italy); Alejandro Vicondoa (Universidad Católica de Chile)
    Abstract: Isolating financial uncertainty shocks is difficult because financial markets rapidly price changes in several economic fundamentals. To bypass this difficulty, we identify uncertainty shocks using daily data and use their monthly averages as an instrument in a VAR. We show that this novel approach is theoretically appealing and has dramatic implications for leading empirical studies on financial uncertainty. Daily interactions between equity returns, bond spreads and expected volatility cause previous identification schemes to fail at the monthly frequency. Once these interactions are explicitly modeled, the impact of uncertainty shocks on output and inflation is significant and similar across specifications.
    Keywords: uncertainty shocks financial shocks structural vector autoregression high-frequency identification external instruments
    JEL: C32 C36 E32
    Date: 2021–04
  10. By: Christoph Gortz (University of Birmingham); John Tsoukalas (University of Glasgow); Francesco Zanetti (University of Oxford)
    Abstract: We examine the dynamic effects and empirical role of TFP news shocks in the context of frictions in financial markets. We document two new facts using VAR methods. First, a (positive) shock to future TFP generates a significant decline in various credit spread indicators considered in the macro-finance literature. The decline in the credit spread indicators is associated with a robust improvement in credit supply indicators, along with a broad based expansion in economic activity. Second, VAR methods also establish a tight link between TFP news shocks and shocks that explain the majority of un-forecastable movements in credit spread indicators. These two facts provide robust evidence on the importance of movements in credit spreads for the propagation of news shocks. A DSGE model enriched with a financial sector generates very similar quantitative dynamics and shows that strong linkages between leveraged equity and excess premiums, which vary inversely with balance sheet conditions, are critical for the amplification of TFP news shocks. The consistent assessment from both methodologies provides support for the traditional 'news view' of aggregate fluctuations.
    Keywords: TFP News shocks, Business cycles, DSGE, VAR, Bayesian estimation
    JEL: E2 E3
    Date: 2021–05
  11. By: Serena Merrino
    Abstract: The aim of this paper is to assess South Africa's fiscal multiplier across different states of the economy, with a focus on the financial accelerator mechanism of fiscal policy shocks, by estimating impulse response functions from both linear and non-linear local projections. The model finds evidence of strong business cycle effects such that, while the average multiplier is below 0.5, it reaches 1.2 during recessions and that, while credit volume diminishes during periods of positive output gap, it expands otherwise.
    Keywords: Fiscal multipliers, impulse response, State-dependent, Credit, South Africa, Financial dynamics, Multiplier effects
    Date: 2021
  12. By: Degryse, Hans; Mariathasan, Mike; Tang, Thi Hien
    Abstract: Global Systemically Important Banks (GSIBs) benefit from implicit government guarantees but face additional capital requirements and oversight. This paper examines the effectiveness of the Financial Stability Board's recently introduced GSIB-framework and its short-run implications for the real economy, by exploiting the leak of a partially accurate GSIB list by the Financial Times. We find that GSIB-designation reduces the supply of syndicated loans to risky corporate borrowers by 8%, and that these borrowers experience lower asset-, investment- and sales growth than similar firms borrowing from non-GSIB banks. The results appear to be driven by stricter supervision, not by higher capital surcharges.
    Date: 2020–12
  13. By: Brezzi, Monica; Ganau, Roberto; Maslauskaite, Kristina; Rodríguez-Pose, Andrés
    Abstract: This paper examines the relationship between credit constraints â?? proxied by the investment-to-cash flow sensitivity â?? and firm-level economic performance â?? defined in terms of labor productivity â?? during the period 2009-2016, using a sample of 22,380 manufacturing firms from 11 European countries. It also assesses how regional institutional quality affects productivity at the level of the firm both directly and indirectly. The empirical results highlight that credit rationing is rife and represents a serious barrier for improvements in firm-level productivity and that this effect is far greater for micro and small than for larger firms. Moreover, high-quality regional institutions foster productivity and help mitigate the negative credit constraints-labor productivity relationship that limits the economic performance of European firms. Dealing with the European productivity conundrum thus requires greater attention to existing credit constraints for micro and small firms, although in many areas of Europe access to credit will become more effective if institutional quality is improved.
    Keywords: credit constraints; Cross-Country Analysis; Europe; labor productivity; Manufacturing firms; Regional Institutions
    JEL: C23 D24 G32 H41 R12
    Date: 2020–11
  14. By: Isaac Marcelin; Daniel Brink; Wei Sun
    Abstract: We study the role of trade credit in enhancing the resilience of financially constrained firms from 2010 to 2017. Implicit borrowing in trade finance allows financially constrained firms to bridge the financing gap, expand employment by 8.26 per cent, and increase average firm profits significantly. Trade finance suppliers, not financially constrained firms, experience a surge of 7.99 per cent in the average rate of sales growth.
    Keywords: Financial constraints, trade credit, Employment, Growth, Firm profitability, Corporate finance
    Date: 2021
  15. By: Andreas Joseph; Christiane Kneer; Neeltje van Horen
    Abstract: Cash holdings at the onset of a financial crisis are a key determinant of investment by SMEs not only during the crisis but also during the recovery period. Cash-rich SMEs could maintain their capital stock during the global financial crisis, while cash-poor rivals reduced theirs. This gave cash-rich SMEs a competitive advantage during the recovery, resulting in a persistent and growing investment gap. The amplification effect was present for SMEs with both volatile and stable cash holdings and was particularly pronounced for younger and smaller firms. Competition dynamics and borrowing constraints seem to drive this amplification effect.
    Keywords: SMEs, investment, cash holdings, financial crisis, misallocation
    JEL: D22 E32 E44 G32
    Date: 2021
  16. By: Beck, Roland; Di Nino, Virginia; Stracca, Livio
    Abstract: We revisit the effects of globalisation over the past 50 years in a large sample of advanced and emerging countries. We use accessions to \Globalisation Clubs" (WTO, OECD, EU), financial liberalisation and an instrument for trade openness to study the trade-off between efficiency (proxied by real GDP per capita and TFP) and equity (proxied by the labour share of income and the Gini index of inequality). We find that (i) most of our episodes lead to an increase in trade openness (ii) effects on GDP per capita are mostly positive with some interesting exceptions and (iii) there is little evidence that globalisation shocks lead to more inequality. JEL Classification: F13, F36
    Keywords: efficiency, equity, EU, financial liberalization, globalisation, OECD, trade integration, WTO
    Date: 2021–05
  17. By: de Ferra, Sergio; Mitman, Kurt; Romei, Federica
    Abstract: Capital flows from equal to unequal countries. We document this empirical regularity in a large sample of advanced economies. The capital flows are largely driven by private savings. We propose a theory that can rationalize these findings: more unequal countries endogenously develop deeper financial markets. Households in unequal counties, in turn, borrow more, driving the observed direction of capital flows.
    Keywords: Capital Flows; current account; inequality
    JEL: E21 F32 F41
    Date: 2021–01
  18. By: Kumhof, Michael; Rungcharoenkitkul, Phurichai; Sokol, Andrej
    Abstract: Understanding gross capital flows is increasingly viewed as crucial for both macroeconomic and financial stability policies, but theory is lagging behind many key policy debates. We fill this gap by developing a 2-country DSGE model that tracks domestic and cross-border gross positions between banks and households, with explicit settlement of all transactions through banks. We formalize the conceptual distinction between cross-border saving and financing, which often move in opposite directions in response to shocks. This matters for at least four policy debates. First, current accounts are poor indicators of financial vulnerability, because in a crisis creditors stop financing debt rather than current accounts, and because following a crisis current accounts are not the primary channel through which balance sheets adjust. Second, we re-interpret the global saving glut hypothesis by submitting that US households do not finance current account deficits with foreigners' physical saving, but with digital purchasing power, created by banks that are more likely to be domestic than foreign. Third, Triffin's current account dilemma is not in fact a dilemma, because the creation of additional US dollars requires dollar credit creation by domestic or foreign banks rather than US current account deficits. Finally, we show that the observed high correlation of gross capital inflows and outflows is overwhelmingly an automatic consequence of double entry bookkeeping, rather than the result of two separate and synchronized sets of economic decisions.
    Keywords: bank lending; current account; global saving glut; Gross capital flows; International Capital Flows; money creation; Sudden stops; Triffin's dilemma
    JEL: E44 E51 F41 F44
    Date: 2020–12
  19. By: Acharya, Viral V.; Vij, Siddharth
    Abstract: We establish that macroprudential policies limiting capital flows can curb risks arising from corporate foreign currency borrowing in emerging markets. Using detailed firm- level data from India, we show that propensity to issue foreign currency debt for the same firm is higher when the difference in short-term interest rates between India and the US is higher, i.e., when the dollar 'carry trade' is more profitable; this behavior is driven by the period after the global financial crisis. The positive relationship between issuance and the 'carry trade' breaks down once regulators institute more stringent interest-rate caps on foreign currency borrowing. Riskier borrowers such as importers and those with higher interest costs cut issuance most. Firm equity exposure to foreign exchange risk rose after issuance in favorable funding conditions and emerged as a source of external sector vulnerability during the 'taper tantrum' of 2013. Macroprudential policy action limiting capital flows is able to nullify this effect, such as during the market stress due to the COVID-19 pandemic.
    Keywords: emerging markets; foreign currency debt; Foreign exchange risk; taper tantrum
    JEL: F31 F34 G15 G30
    Date: 2020–11
  20. By: Nathan Converse (Federal Reserve Board); Eduardo Levy Yeyati (Universidad Torcuato Di Tella/The Brookings Institution); Tomas Williams (George Washington University)
    Abstract: Since the early 2000s exchange-traded funds (ETFs) have grown to become an important in- vestment vehicle worldwide. In this paper, we study how their growth affects the sensitivity of international capital flows to the global financial cycle. We combine comprehensive fund- level data on investor flows with a novel identification strategy that controls for unobservable time-varying economic conditions at the investment destination. For dedicated emerging market funds, we find that the sensitivity of investor flows to global financial conditions for equity (bond) ETFs is 2.5 (2.25) times higher than for equity (bond) mutual funds. In turn, we show that in countries where ETFs hold a larger share of financial assets, total cross-border equity flows and prices are significantly more sensitive to global financial conditions. We conclude that the growing role of ETFs as a channel for international capital flows amplifies the global financial cycle in emerging markets.
    Keywords: exchange-traded funds mutual funds global financial cycle global risk push and pull factors capital flows emerging markets
    JEL: F32 G11 G15 G23
    Date: 2021–04
  21. By: Mary Amiti; Sang Hoon Kong; David Weinstein
    Abstract: We show that the specific factors model can be used to derive a rigorous link between movements in stock prices and productivity, wages, employment, output, and welfare. We also prove that the commonly used measure of the effective rate of protection equals the dual measure of revenue TFP, providing a theoretical foundation for why many studies have found that trade liberalization significantly increases firm-level productivity. Our method enables us to trace a tariff announcement's effect on TFP through its impact on macro variables (e.g., exchange rates) and through its effect on the relative prices of imports. We apply this framework to understanding the implications of the U.S.-China trade war. Our results show that the trade-war announcements caused large declines in U.S. stock prices, expected TFP, and expected inflation largely by moving macro variables, but also by causing declines in the returns of firms trading with China. We find that markets expect the trade war to lower U.S. welfare by 7.8 percentage points, which is much larger than the predictions of static models but in line with those of dynamic models.
    JEL: F13 F14 F16
    Date: 2021–05
  22. By: Irma Alonso (Banco de España); Luis Molina (Banco de España)
    Abstract: This paper presents a simple, transparent and model-free framework for monitoring the build-up of vulnerabilities in emerging economies that may affect financial stability in Spain through financial, foreign direct investment or trade linkages, or via global turbulences. The vulnerability dashboards proposed are based on risk percentiles for a set of 34 key indicators according to their historical and cross-section frequency distributions. The framework covers financial market variables, macroeconomic fundamentals –which are grouped into real, fiscal, banking and external variables– and institutional quality and political indicators. This methodology is a valuable complement to other existing tools such as the Basel credit-to-GDP gap and vulnerability indices.
    Keywords: emerging economies, crisis, vulnerabilities, heat maps, risks
    JEL: F01 F34 G01 G32
    Date: 2021–04
  23. By: Giannetti, Mariassunta; Jang, Yeejin
    Abstract: We show that foreign lenders and low market share lenders extend more credit in comparison to other lenders during lending booms leading to banking crises, but not during other credit expansions. Less established lenders also increase the amount of credit they extend to riskier borrowers, without asking for collateral or imposing covenants and higher interest rates. Our results suggest that taking lenders' characteristics into account could provide an indicator for how much risk an economy is accumulating and be a useful barometer for macroprudential policies.
    Keywords: Credit Booms; Crises; foreign banks
    JEL: F3 G21
    Date: 2021–01
  24. By: Hardouvelis, Gikas A.
    Abstract: The paper provides a brief history of the decade long Greek banking crisis, which reshaped the banking system into essentially four systemic banks, owning 96% of total assets. The crisis also led bank stock prices to a value of almost zero twice in a row, once in early 2012 after the PSI bond haircut, and again in late 2015, after the politically generated recession and the GREXIT fears of the first semester of the year. Today the amount of legacy nonperforming loans (NPLs) or exposures (NPEs) is enormous and by far the highest in Europe. It has to decline fast to non-crisis levels for the banks to be able to provide fresh credit and support the economy. A rapid reduction of NPEs is hampered by two key obstacles: First, the NPE reduction causes a loss in equity capital, which could lead to a violation of the Basel III capital requirements; and second, the NPE reduction can easily lead to negative annual profitability, which could force dilution of private sector stock ownership, caused by the 2014 legislation of Deferred Tax Credit (DTC). The higher the NPEs and the lower the provisions of banks, the higher their need for fresh capital. Banks differ in those characteristics and some may not avoid an eventual recapitalization in 2021. The stricter regulators are in their minimum capital ratio requirements or the more pessimistic private investors are on their valuations of the bank NPEs, the higher the need for fresh capital for the banks. A sensitivity analysis of the bank capital needs to these two exogenous variables (Table 2.2), reveals a fragile situation, in which capital needs can easily sky-rocket. In the medium term, the drive to increase annual profitability remains a strategic one-way street for banks. The challenges Greek banks face are very similar to those of European banks, though with some distinct features. The environment of low interest rates, intense competition with technology companies that are gradually penetrating retail banking, and the constant tightening of the supervisory framework, is putting pressure on their profitability. Additional Greek pressures arise from (i) the negative impact of reduced NPEs on accounting profitability; (ii) the digital transformation of the economy, which entails massive increases in investment in IT projects and in executives’ training; (iii) a switch of traditional bank customers towards alternative sources of financing; (iv) the high operating costs, which are inherited from the earlier prosperous times, and so on.
    JEL: N0 F3 G3
    Date: 2021–05–01
  25. By: Christian-Lambert Nguena (Faculté des Sciences Economiques et de Gestion de Dschang - Université de Dschang)
    Abstract: Es gibt eine bedeutsame Debatte über die Rolle, die Finanztechnologie-Innovationen (Fintech) für die Fragilität des Bankensektors spielen. Angesichts der Bedeutung finanzieller Solidität, widersprüchlicher theoretischer Vorhersagen und empirischer Belege ist eine eingehende Untersuchung dieses Zusammenhangs erforderlich. Anhand von Daten von 690 Banken in 34 Ländern südlich der Sahara für den Zeitraum 1999-2015 sowie von FGLS, GMM, Panel Threshold Regression und PCA-Ökonometriemethode wird in diesem Artikel der Einfluss von Fintech-Innovationen auf die Fragilität von Banken empirisch untersucht. Hauptsächlich wird die destabilisierende Wirkung von Fintech-Innovationen für unsere Basisuntersuchung bestätigt, später jedoch mit einer stabilisierenden Wirkung nach einem bestimmten Schwellenwert relativiert. Darüber hinaus unterstreichen die Ergebnisse auch, dass das makroökonomische Umfeld für die Erklärung der Fragilität von Banken wichtig ist, und schlugen vor, dass die öffentliche Ordnung einige spezifische destabilisierende Folgen für das Bankensystem berücksichtigen sollte. Außerdem zeigt der simultane Hypothesentest des Nexus der Innovationsagilität, der von einigen relevanten Variablen abhängig ist, dass finanzielle Offenheit eine Rolle spielt, während Investitionen, kommerzielle Offenheit und Geldpolitik dies nicht tun. Schließlich bestätigt die vergleichende Analyse unsere Heterogenitätshypothese; Länder mit einem großen Bankensektor, der von Frankreich und Mitgliedern der Währungsunion kolonialisiert wurde, schneiden in Bezug auf die Solidität der Banken besser ab als die anderen. Diese Ergebnisse deuten darauf hin, dass eine geeignete Fintech-Innovationspolitik auch zwischen denselben Regionen sehr unterschiedlich sein könnte. Finanzielle Instabilität schien auch die Fragilität der Banken zu erhöhen. Dieses Papier trägt zur begrenzten Literatur über Fintech-Innovationen auf Makro- und Mikroebene in Afrika südlich der Sahara bei.
    Abstract: There is a momentous debate on the role played by financial technology (fintech) innovation in the fragility of the banking sector. Considering the importance of financial solidness, contradictory theoretical predictions and empirical evidence, an in-depth re-investigation of this relation is needed. Using data of 690 banks across 34 Sub Saharan African countries for the period 1999-2015 along with FGLS, GMM, Panel Threshold regression and PCA econometric method, this paper empirically examines the influence of fintech innovation on bank fragility. Mainly the destabilizing impact of fintech innovation is confirmed for our baseline investigation but later relativized with a stabilizing impact after a certain threshold. Moreover, the results highlight also that the macroeconomic environment is important in explaining bank fragility and suggested that public policy should take into account some specific destabilizing consequences on the banking system. Besides, the simultaneous hypothesis test of the innovation agility nexus conditional to some relevant variables reveals that financial openness does matter while investment, commercial openness and monetary policy do not. Lastly, the comparative analysis validates our heterogeneity hypothesis; countries with a high size banking sector, colonialized by France and members of monetary union performs better than the others in terms of bank solidness. These results indicate that suitable fintech innovation policy even between the same regions could be rather different. Financial instability appeared also to increase bank fragility. This paper contributes to the limited literature on fintech innovation at both the macro and micro levels in sub-Saharan Africa.
    Keywords: Fintech innovation,Bank fragility,Threshold regression,Technology transformation
    Date: 2020–04–28
  26. By: Simplice A. Asongu (Yaounde, Cameroon); Nicholas M. Odhiambo (Pretoria, South Africa)
    Abstract: This study complements the extant literature by assessing how enhancing supply factors of mobile technologies affect mobile money innovations for financial inclusion in developing countries. The mobile money innovation outcome variables are: mobile money accounts, the mobile phone used to send money and the mobile phone used to receive money. The mobile technology supply factors are: unique mobile subscription rate, mobile connectivity performance, mobile connectivity coverage and telecommunications (telecom) sector regulation. The empirical evidence is based on quadratic Tobit regressions and the following findings are established. There are Kuznets or inverted shaped nexuses between three of the four supply factors and mobile money innovations from which thresholds for complementary policies are provided as follows: (i) Unique adults’ mobile subscription rates of 128.500%, 121.500% and 77.750% for mobile money accounts, the mobile used to send money and the mobile used to receive money, respectively; (ii) the average share of the population covered by 2G, 3G and 4G mobile data networks of 61.250% and 51.833% for the mobile used to send money and the mobile used to receive money, respectively; and (iii) a telecom sector regulation index of 0.409, 0.283 and 0.283 for mobile money accounts, the mobile phone used to send money and the mobile phone used to receive money, respectively. Some complementary policies are discussed, because at the attendant thresholds, the engaged supply factors of mobile money technologies become necessary, but not sufficient conditions of mobile money innovations for financial inclusion.
    Keywords: Mobile money; technology diffusion; financial inclusion; inclusive innovation
    JEL: D10 D14 D31 D60 O30
    Date: 2021–01
  27. By: Emily Johnston-Ross; Song Ma; Manju Puri
    Abstract: This paper investigates the role of private equity (PE) in failed bank resolutions after the 2008 financial crisis, using proprietary FDIC failed bank acquisition data. PE investors made substantial investments in underperforming and riskier failed banks, particularly in geographies where local banks were also distressed, filling the gap created by a weak, undercapitalized banking sector. Using a quasi-random empirical design based on detailed bidding information, we show PE-acquired banks performed better ex post, with positive real effects for the local economy. Overall, PE investors had a positive role in stabilizing the financial system through their involvement in failed bank resolution.
    JEL: E65 G18 G21
    Date: 2021–05
  28. By: David Adeabah (University of Ghana, Legon, Ghana); Charles Andoh (University of Ghana, Legon, Ghana); Simplice A. Asongu (Yaoundé, Cameroon); Albert Gemegah (University of Ghana, Legon, Ghana)
    Abstract: Reputation is an important factor for long-term stability, competitiveness, and success of all contemporary organizations. It is even more important for banks because of their systemic role in a modern economy. In this study, we present a review of the current body of literature regarding reputational risks in banks. Using the systematic literature review method, 35 articles published from 2010 to 2020 are reviewed and analyzed. It was found that only developed countries (i.e., the United States and Europe) have been actively contributing to research on reputational risks in banks, suggesting that reputational risks management of banks has not gained the global attention it deserves. Additionally, issues of mitigation of reputational risks are identified as the most frequently studied research theme with a paucity of research on measurement, determinants, and implications of reputational risks at both micro and macro levels. Furthermore, it was noticed that reputational risk management frameworks are still underdeveloped. In theory, this review should help with a strong conceptualization of reputational risks management in banks and guide further research.
    Keywords: reputational risks; banks; systematic literature review
    Date: 2021–05
  29. By: Nirupama Kulkarni (CAFRAL); S.K. Ritadhi (Ashoka University); Siddharth Vij (University of Georgia); Katherine Waldock (Columbia University)
    Abstract: Since ineffective debt resolution perpetuates zombie lending, bankruptcy reform has emerged as a solution. We show, however, that lender-based frictions can limit reform impact. Exploiting a unique empirical setting and novel supervisory data from India, we document that a new bankruptcy law had muted effects on lenders recognizing zombie borrowers as non-performing. A subsequent unexpected regulation, targeting perverse lender incentives to continue concealing zombies, increased zombie recognition particularly for undercapitalized and government-owned banks, highlighting the role of bank capital and political frictions in sustaining zombie lending. Resolving zombie loans allowed lenders to reallocate credit to healthier borrowers who increased investment.
    Keywords: Zombie; Bankruptcy; Banking Regulation; India; Creative Destruction
    Date: 2021–05
  30. By: Jagriti Srivastava (Indian Institute of Management Kozhikode); Balagopal Gopalakrishnan (Indian Institute of Management Kozhikode)
    Abstract: This paper examines the impact of COVID-19 on venture capital financing of firms. We find a significant shift in the profile of firms that obtain venture capital financing during the pandemic-induced economic crisis. Firms in industries that are more amenable to work from home obtain greater amounts of financing. Growthstage firms operating in amenable industries are able to obtain higher financing than early-stage firms. The higher financing obtained by firms in amenable industries is driven by venture capital funds focused on the domestic market. Additionally, the higher financing is obtained from a single venture capital investor rather than a consortia of investors. Taken together, the preference of venture capital funds indicate a less risk-averse behaviour in financing firms amenable to remote working. The findings of our study using monthly firm-level data provide insights on venture capital financing during the pandemic.Length: 43 pages
    Keywords: COVID-19; Venture capital; financing; work from home
    Date: 2021–04
  31. By: Yavuz Arslan; Ahmet Degerli; Gazi Kabaş
    Abstract: We use disaggregated U.S. data and a border discontinuity design to show that more generous unemployment insurance (UI) policies lower bank deposits. We test several channels that could explain this decline and find evidence consistent with households lowering their precautionary savings. Since deposits are the largest and most stable source of funding for banks, the decrease in deposits affects bank lending. Banks that raise deposits in states with generous UI policies squeeze their small business lending. Furthermore, counties that are served by these banks experience a higher unemployment rate and lower wage growth.
    Keywords: Bank funding; Bank lending; Labor; Precautionary saving; Unemployment insurance
    JEL: D14 G21 J20 J65
    Date: 2021–04–30
  32. By: Arabzadeh, Hamzeh; Balleer, Almut; Gehrke, Britta
    Abstract: How do wages respond to financial recessions? Based on a dynamic macroeconomic model with frictions in the labor and the financial market, we address two prominent mechanism through which firms' financial constraints amplify unemployment and explore their effect on wages. First, the financial labor wedge reduces wages. Second, financial constraints may interact with aggregate labor market conditions in various ways putting upward or downward pressure on wages. We test partial-equilibrium implications of these theoretical mechanisms based on a large data set for Germany for 2006 to 2014 that combines administrative data on workers and wages with detailed information on the balance sheets of firms. Both mechanisms play a role empirically. Using our estimates as central calibration targets in our model, we document that financial recessions are associated with a substantial decline in both unemployment and wages. Financial constraints therefore weaken the direct link between wage rigidity and unemployment volatility.
    Keywords: business cycles; Financial Frictions; Search and Matching; unemployment; wages
    JEL: E32 E44 J63 J64
    Date: 2020–12
  33. By: Kuchler, Theresa; Ströbel, Johannes
    Abstract: We review an empirical literature that studies the role of social interactions in driving economic and financial decision making. We first summarize recent work that documents an important role of social interactions in explaining household decisions in housing and mortgage markets. This evidence shows, for example, that there are large peer effects in mortgage refinancing decisions and that individuals' beliefs about the attractiveness of housing market investments are affected by the recent house price experiences of their friends. We also summarize the evidence that social interactions affect the stock market investments of both retail and professional investors as well as household financial decisions such as retirement savings, borrowing, and default. Along the way, we describe a number of easily accessible recent data sets for the study of social interactions in finance, including the "Social Connectedness Index,'' which measures the frequency of Facebook friendship links across geographic regions. We conclude by outlining several promising directions for further research in the field of "social finance.''
    Date: 2020–12
  34. By: Denitsa Angelova (Department of Economics, University Of Venice Cà Foscari; Euro-Mediterranean Center on Climate Change (CMCC)); Francesco Bosello (Department of Economics, University Of Venice Cà Foscari; Euro-Mediterranean Center on Climate Change (CMCC)); Andrea Bigano (Euro-Mediterranean Center on Climate Change (CMCC); RFF-CMCC European Institute on Economics and the Environment (EIEE)); Silvio Giove (Department of Economics, University Of Venice Cà Foscari)
    Abstract: We review the sovereign credit rating methodologies of three credit rating agencies (Moody’s, S&P and Fitch) and analyze how they currently accommodate climate change risk and ESG considerations. We elaborate on the differences between the three rating methodologies and critically evaluate their suitability and limitations. We propose lines of improvement with respect to the indicator selection, normalization, aggregation and weighting procedures as well as the use of the sovereign rating indicator in connection with climate change scenarios.
    Keywords: Climate risk, sovereign risk, sovereign credit, rating agency
    JEL: G24 H63 Q54
    Date: 2021

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