nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2021‒05‒24
thirty papers chosen by
Georg Man

  1. Banks, Credit Supply, and the Life Cycle of Firms: Theory and Evidence from Late Nineteenth Century Japan By Sergi Basco; John P. Tang
  2. Not an ordinary bank but a great engine of state: the bank of England and the British economy, 1694-1844 By O'Brien, Patrick; Palma, Nuno Pedro G.
  3. Financing the rebuilding of the City of London after the Great Fire of 1666 By Coffman, D'Maris; Stephenson, Judy Z.; Sussman, Nathan
  4. Money, Banking, and Old-School Historical Economics By Monnet, Eric; Velde, François R.
  5. Financial development and income inequality: a nonlinear econometric analysis of 21 African countries, 1994-2015 By Lindokuhle Talent Zungu; Lorraine Greyling
  6. The Legal Origins of Financial Development: Evidence from the Shanghai Concessions By Ross Levine; Chen Lin; Chicheng Ma; Yuchen Xu
  7. The Short-Run and Long-Run Effects of Trade Openness on Financial Development: Some Panel Evidence for Europe By Guglielmo Maria Caporale; Anamaria Sova; Robert Sova
  8. Were Late-Nineteenth-Century, Small-Town Americans Life-Cycle Savers? By Howard Bodenhorn
  9. The Great Depression as a Saving Glut By Degorce, Victor; Monnet, Eric
  10. Trade Credit and Sectoral Comovement during the Great Recession By Jorge Miranda-Pinto; Gang Zhang
  11. Intangible Capital and Firm-Level Productivity – Evidence from Germany By Roth, Felix; Sen, Ali; Rammer, Christian
  12. A risk management perspective on macroprudential policy By Chavleishvili, Sulkhan; Fahr, Stephan; Kremer, Manfred; Manganelli, Simone; Schwaab, Bernd
  13. The impact of macroprudential policies on capital flows in CESEE By Eller, Markus; Hauzenberger, Niko; Huber, Florian; Schuberth, Helene; Vashold, Lukas
  14. Heterogeneous Effects of Macroprudential Policies on Firm Leverage and Value By Hyunduk Suh; Jin Young Yang
  15. The Economics of Currency Risk By Hassan, Tarek Alexander; Zhang, Tony
  16. The South African - United States Sovereign Bond Spread and its Association with Macroeconomic Fundamentals By Johannes W. Fedderke
  17. Barriers to Global Capital Allocation By Bruno Pellegrino; Enrico Spolaore; Romain Wacziarg
  18. The Costs of Political Manipulation of Factor Markets in China By Henderson, Vernon; Su, Dongling; Zhang, Qinghua; Zheng, Siqi
  19. Global Financial Cycle and Liquidity Management By Jeanne, Olivier; Sandri, Damiano
  20. Reserve Accumulation, Macroeconomic Stabilization, and Sovereign Risk By Javier Bianchi; César Sosa Padilla
  21. The Nonlinear Relationship Between Public Debt and Sovereign Credit Ratings By Hadzi-Vaskov, Metodij; Ricci, Luca Antonio
  22. Small and medium enterprises in access to Bank credit in Mozambique By ALFAZEMA, ANTONIO
  23. The Impact of Financial Education of Managers on Medium and Large Enterprises - A Randomized Controlled Trial in Mozambique By Custódio, Cláudia; Mendes, Diogo; Metzger, Daniel
  24. Using Principal Component Analysis to create an index of financial conditions in Spain. Differences by firm size and industry By Román-Aso, Juan A.; Coca Villalba, Fernando; Mastral Franks, Vanessa; Bosch Frigola, Irene
  25. Finance and Technology: What is changing and what is not By Cecchetti, Stephen G; Schoenholtz, Kermit
  26. Data vs collateral By Chen, Shu; Gambacorta, Leonardo; Huang, Yiping; Li, Zhenhua; Qiu, Han
  27. Forward looking loan provisions: Credit supply and risk-taking By Morais, Bernardo; Ormazabal, Gaizka; Peydró, José Luis; Roa, Monica; Sarmiento, Miguel
  29. Do banks fuel climate change? By Reghezza, Alessio; Altunbas, Yener; Marqués-Ibáñez, David; Rodriguez d’Acri, Costanza; Spaggiari, Martina
  30. Managerial and financial barriers to the net-zero transition By De Haas, Ralph; Martin, Ralf; Muûls, Mirabelle; Schweiger, Helena

  1. By: Sergi Basco; John P. Tang
    Abstract: How does local credit supply affect economic dynamism? Using an exogenous bond shock in historical Japan and new genealogical firm-level data, we empirically examine the effects of credit availability on firm life cycles. Our main result shows that, consistent with our theoretical model, the lifespan of firms decreases with bank capital. Capital-abundant regions have more firm destruction. For manufacturing, we document that these regions have both increased firm creation and destruction. These results suggest that samurai bonds were conducive to the emergence of banking, which eased firms’ financial constraints and led to more economic dynamism.
    Keywords: credit supply, banks, liquidity constraints, firm dynamics, entrepreneurship
    JEL: E51 N15 O16
    Date: 2021–05
  2. By: O'Brien, Patrick; Palma, Nuno Pedro G.
    Abstract: From its foundation as a private corporation in 1694 the Bank of England extended large amounts of credit to support the British private economy and to support an increasingly centralized British state. The Bank helped the British state reach a position of geopolitical and economic hegemony in the international economic order. In this paper we deploy recalibrated financial data to analyse an evolving trajectory of connexions between the British economy, the state, and the Bank of England. We show how these connections contributed to form an effective and efficient fiscal-naval state and promoted the development of a system of financial intermediation for the economy. This symbiotic relationship became stronger after 1793. The evidence that we consider here shows that although the Bank was nominally a private institution and profits were paid to its shareholders, it was playing a public role well before Bagehot's doctrine.
    Keywords: Bank of England; National defence; State-building institutions
    JEL: H41 N13 N23 N43
    Date: 2020–10
  3. By: Coffman, D'Maris; Stephenson, Judy Z.; Sussman, Nathan
    Abstract: This paper presents new archival data to analyse how, in the absence of banking or capital market finance, the London Corporation funded the rebuilding of London after the Great Fire of 1666. The City borrowed at rates much lower than previously thought from its citizens and outside investors to replace vital services and to support large improvement works. Borrowing was partly secured on its' reputation and partly secured by future coal tax receipts. Although records show that the funding from these sources was forthcoming and would have covered costs, and most of the rebuilding project was completed in less than a decade, having invested in public goods without generating the expected fiscal flows, the City defaulted in 1683.
    Keywords: default; England; Financial Development; Financial Intermediation; growth; interest rate
    JEL: G23 N2 N23 O16 O43
    Date: 2020–11
  4. By: Monnet, Eric; Velde, François R.
    Abstract: We review developments in the history of money, banking, and financial intermediation over the last twenty years. We focus on studies of financial development, including the role of regulation and the history of central banking. We also review the literature of banking and financial crises. This area has been largely unaffected by the so-called new econometric methods that seek to prove causality in reduced form settings. We discuss why historical macroeconomics is less amenable to such methods, discuss the underlying concepts of causality, and emphasize that models remain the backbone of our historical narratives.
    Keywords: Banking; Causality; Financial Intermediation; historical macroeconomics; money
    JEL: N01 N10 N20
    Date: 2020–10
  5. By: Lindokuhle Talent Zungu; Lorraine Greyling
    Abstract: A panel data analysis of financial inequality was conducted using the PSTR model to determine the threshold level at which excessive financial development worsens inequality. The results reveal evidence of a nonlinear effect between financial development and income inequality where the optimal level of financial development is found to be 19% as a share of GDP above which financial development increases inequality in African countries. The findings combine into a U-shape relationship, in line with other research in African studies. In this particular case, policy-makers are challenged to come up with policies that enforce the distributive effects of financial development with a view to share wealth equitably.
    Keywords: Financial development; income inequality; PSTR model
    JEL: O16 O11 E44 C33
    Date: 2021–02
  6. By: Ross Levine; Chen Lin; Chicheng Ma; Yuchen Xu
    Abstract: We assemble new data on the British and French concessions in Shanghai between 1845 and 1936 to assess the legal origins view of financial development. During this period, two regime changes altered the degree to which the British common and French civil law traditions held jurisdiction over the respective concessions: the 1869 formation of the Mixed Courts strengthened Western legal jurisdiction, while the 1926 rendition agreement returned those courts to Chinese control. By examining the changing application of different legal traditions to adjacent neighborhoods within the same city, we address identification challenges associated with cross-country studies. Consistent with the legal origins view, the financial development advantage in the British concession widened after the formation of the Courts and shrank after their rendition.
    JEL: G21 K4 N25 O16
    Date: 2021–05
  7. By: Guglielmo Maria Caporale; Anamaria Sova; Robert Sova
    Abstract: This paper analyses the short- and long-run effects of trade openness on financial development in a panel including data on 35 European countries over the period 2001-2019. For this purpose, it uses the PMG (pooled mean group) estimator for dynamic panels developed by Pesaran et al. (1999). The results differ depending on the income, governance and financial development level of the countries considered. In particular, it appears that in the middle-income countries trade openness tends to strengthen financial development in the long run but to have an adverse effect in the short run. By contrast, in the case of high-income countries with better institutions and a higher level of financial development, there is a positive and significant impact in the short run. Some policy implications of these findings are drawn.
    Keywords: trade openness, financial development, panel data, PMG estimator, Europe
    JEL: E61 F13 F15 C25
    Date: 2021
  8. By: Howard Bodenhorn
    Abstract: Although the mobilization of savings is an important function of banks and other financial institutions, there is remarkably little evidence that bears on how and how well the financial sector mobilized household savings in the nineteenth and early twentieth century. This paper documents financial wealth accumulated by working-class Americans to see whether their behaviors followed the predictions of the life-cycle hypothesis. Hand-coded data from an Upstate New York savings bank matched to federal and state census data provides longitudinal data on individual savers between 20 and 90 years old. Fixed effects estimates on an unbalanced panel generates results that are consistent with the life-cycle hypothesis. Wealth-at-age profiles exhibit the classic hump shape, with peak wealth occurring in savers’ mid-sixties. At peak wealth, mean and median savers accumulated the equivalent of about one year’s income for a working-class man. Wealth declines with the number of children present in the household. Moreover, the native- and the foreign-born, and individuals born into different cohorts all accumulated wealth in a fashion consistent with the hypothesis’ predictions.
    JEL: N21
    Date: 2021–05
  9. By: Degorce, Victor; Monnet, Eric
    Abstract: Facing the Great Depression, Keynes blamed the detrimental consequences of precautionary savings on growth (paradox of thrift). Yet, the magnitude, forms and effects of savings accumulation remain unexplored in studies on the international economic crash of the 1930s. Based on new data for 22 countries, we document that the Great Depression was associated with a large international increase in savings institutions' deposits. Banking crises spurred precautionary savings. Panel estimations show a negative conditional correlation between real GDP and deposits in savings institutions when a banking crisis hit. A back-of-the-envelope calculation suggests that the negative effect of precautionary savings on growth was at least as large as the direct effect of the decline in banking activity. The evolution of the saving rate began to reverse as countries left the gold standard.
    Keywords: banking crises; Great Depression; paradox of thrift; precautionary savings; Savings Banks
    JEL: B22 E21 E51 G01 G21 N1 N2
    Date: 2020–09
  10. By: Jorge Miranda-Pinto (School of Economics, University of Queensland; MRG - School of Economics, The University of Queensland); Gang Zhang
    Abstract: We show that, unlike any other recession after World War II, sectoral output comovement significantly increased during the Great Recession. On the other hand, trade credit supply, as measured by the ratio of account receivables to the total value of outputs, collapsed during the Great Recession. We show that sectoral comovement was larger for sectors connected through trade credit. We then develop a multisector model with occasionally binding credit constraints and endogenous supply of trade credit to explain these facts. The model shows that equilibrium trade credit reflects both the intermediate supplier’s and client’s bank lending conditions, and thus has asymmetric effects on sectoral outputs. When banking shocks are idiosyncratic, trade credit serves as a mitigation mechanism as firms are able to substitute bank loans for trade credit. However, when banking shocks are strongly correlated, trade credit amplifies the negative financial shock and generates the sharp increase in sectoral comovement observed during the Great Recession. We show that production network models with reduced form wedges are unable to generate this pattern, and that a model with endogenous trade credit amplifies the Great Recession in 18%.
    Keywords: Sectoral Comovement, Production Network, Trade Credit, Financial Friction
    JEL: C67 E23 E32 E44 E51 F40 G30
  11. By: Roth, Felix; Sen, Ali; Rammer, Christian
    Abstract: This paper analyses the impact of intangible capital on firm-level productivity for Germany using panel data from the Community Innovation Survey for the time period 2006 to 2018. Our paper presents three novel results. First, we find a highly significant positive relationship between intangible capital and firm-level productivity with elasticities overall in line with previous findings reported for other large EU economies. Second, our results show that both manufacturing and services are highly intangible-capital intensive, and that intangibles have a greater impact on firm-level productivity in services - particular in the business services sector. Third, our results show that intangible capital investments in German firms are equal to investments in tangible capital since the early 2000s. Overall, the evidence presented in our paper indicates that Germany - in line with other advanced economies - has undergone a structural transition into a knowledge economy in which intangibles act as an important driver of firm-level productivity.
    Keywords: Intangible capital,firm-level productivity,panel data,Germany
    JEL: D24 O30 L22 C33
    Date: 2021
  12. By: Chavleishvili, Sulkhan; Fahr, Stephan; Kremer, Manfred; Manganelli, Simone; Schwaab, Bernd
    Abstract: Macroprudential policymakers assess medium-term downside risks to the real economy arising from financial imbalances and implement policies aimed at managing those risks. In doing so, they face an inherent intertemporal trade-off between the expected growth and downside risks. This paper reviews the literature on Growth-at-Risk, embeds it in the wider literature on macroprudential policy, and proposes an empirical risk management framework that combines insights from the two literatures, by forecasting the entire real GDP growth distribution with a structural quantile vector autoregressive model. It accounts for direct and indirect interactions between financial vulnerabilities, financial stress and real GDP growth and allows for potential non-linear amplification effects. The framework provides policymakers with a macro-financial stress test to monitor downside risks to the economy and a macroprudential stance metric to quantify when interventions may be beneficial. JEL Classification: G21, C33
    Keywords: financial conditions, growth-at-risk, macroprudential policy, quantile vector autoregression, stress testing
    Date: 2021–05
  13. By: Eller, Markus; Hauzenberger, Niko; Huber, Florian; Schuberth, Helene; Vashold, Lukas
    Abstract: In line with the recent policy discussion on the use of macroprudential measures to respond to cross-border risks arising from capital flows, this paper tries to quantify to what extent macroprudential policies (MPPs) have been able to stabilize capital flows in Central, Eastern and Southeastern Europe (CESEE) – a region that experienced a substantial boom-bust cycle in capital flows amid the global financial crisis and where policymakers had been quite active in adopting MPPs already before that crisis. To study the dynamic responses of capital flows to MPP shocks, we propose a novel regime-switching factor-augmented vector autoregressive (FAVAR) model. It allows to capture potential structural breaks in the policy regime and to control – besides domestic macroeconomic quantities – for the impact of global factors such as the global financial cycle. Feeding into this model a novel intensity-adjusted macroprudential policy index, we find that tighter MPPs may be effective in containing domestic private sector credit growth and the volumes of gross capital inflows in a majority of the countries analyzed. However, they do not seem to generally shield CESEE countries from capital flow volatility. JEL Classification: C38, E61, F44, G28
    Keywords: capital flows, CESEE, global factors, macroprudential policy, regime-switching FAVAR
    Date: 2021–05
  14. By: Hyunduk Suh (Inha University); Jin Young Yang (Zayed University)
    Abstract: We empirically investigate the effect of financial institution-targeted macroprudential policies on firms, using a comprehensive macroprudential policy dataset and corporate panel data across 29 countries. We find that the tightening of macroprudential measures persistently curbs the leverage growth of firms, while there is no indication that the loosening of the measures is related to the increase in leverage growth. We also find that this effect on leverage is heterogeneous across firms, as net macroprudential policy actions reduce the procyclicality of leverage more significantly for small firms and firms with high leverage. Also, we estimate the effect of macroprudential policies on firm value to evaluate potential policy trade-offs as the policies restrict the firms' access to credit during economic booms while protecting them from future financial crises. The effect of macroprudential policies on firm value is generally positive despite the policies' restrictive nature. Further, the effect on firm value is heterogeneous depending on firm characteristics: the positive effect becomes stronger as firms are less leveraged; but this positive effect is weaker for firms that grow faster, suggesting potential costs of macroprudential policies for these firms.
    Keywords: Macroprudential policy, Firm heterogeneity, Leverage, Tobin’s Q
    JEL: E51 E58 G18
    Date: 2021–04
  15. By: Hassan, Tarek Alexander; Zhang, Tony
    Abstract: This article reviews the literature on currency and country risk with a focus on its macroeconomic origins and implications. A growing body of evidence shows countries with safer currencies enjoy persistently lower interest rates and a lower required return to capital. As a result, they accumulate relatively more capital than countries with currencies international investors perceive as risky. Whereas earlier research focused mainly on the role of currency risk in generating violations of uncovered interest parity and other financial anomalies, more recent evidence points to important implications for the allocation of capital across countries, the efficacy of exchange rate stabilization policies, the sustainability of trade deficits, and the spillovers of shocks across international borders.
    Keywords: Capital Flows; carry trade; Country risk; currency risk; Forward premium puzzle; uncovered interest parity
    Date: 2020–09
  16. By: Johannes W. Fedderke
    Abstract: The yield spread of South African to United States 10 year government bonds over the last 5 years has increased substantially to levels approaching those last seen during the mid-1980s. This yield spread increase is replicated in spreads relative to long-term German bonds, as well as for the spread of state owned enterprises (ESKOM) to United States and German bonds. This paper examines the association between the spread and macroeconomic fundamentals over the 1960-2019 sample period, under the GARCH and GARCH-M class of estimators. We find that higher South African economic growth, lower inflation, public and private debt, as well as Rand-Dollar appreciation are all associated with a statistically significantly lower South African - United States yield spread. The strongest impact is associated with the public debt-to-GDP ratio. Mean spread levels do not appear to be influenced by yield volatility. Finally, while there is no evidence of sign bias in the impact of shocks on yield volatility (negative shock impacts are no di¤erent than positive), there is evidence of size bias for both positive and negative shocks: larger shocks have a larger impact on volatility than small, regardless of their sign. Collectively, and even ignoring the impact of private sector leveraging, South Africa’s performance in these macroeconomic fundamentals is associated with an increase in the SA-US yield spread of 363 basis points (since 2012). This constitutes a substantial proportion of the current 741 basis point spread.
    Keywords: sovereign bond spreads, macoreconomic fundamentals, South Africa
    JEL: E4 E5 E6
    Date: 2020–08
  17. By: Bruno Pellegrino; Enrico Spolaore; Romain Wacziarg
    Abstract: We quantify the impact of barriers to international investment, using a novel multi-country dynamic general equilibrium model with heterogeneous investors and imperfect capital mobility. Our model yields a gravity equation for bilateral foreign asset positions. We estimate this gravity equation using recently developed foreign investment data that have been restated to account for offshore investment and financing vehicles. We show that a parsimonious implementation of the model with four barriers (geographic distance, cultural distance, foreign investment taxation, and political risk) accounts for a large share of the observed variation in bilateral foreign investment positions. Our model predicts (out of sample) a significant home bias, higher rates of return on capital in emerging markets, as well as “upstream” capital flows. In our benchmark calibration, we estimate that the capital misallocation induced by these barriers reduces World GDP by 7%, compared to a situation without barriers. We also find that barriers to global capital allocation contribute significantly to cross-country inequality: the standard deviation of log capital per employee is 80% higher than it would be in a world without barriers to international investment, while the dispersion in output per employee is 42% higher.
    Keywords: capital allocation, capital flows, foreign investment, culture, geography, gravity, international macroeconomics, international finance, misallocation, open economy
    JEL: E22 E44 F20 F30 F40 G15 O40
    Date: 2021
  18. By: Henderson, Vernon; Su, Dongling; Zhang, Qinghua; Zheng, Siqi
    Abstract: Despite China's economic achievements, factor market reforms have been slow. We analyze local political manipulation of land markets, along with capital market favoritism of certain cities, using a structural general equilibrium model. We estimate city-by-city local leaders' preferences over GDP enhancement versus residents' welfare. Equalizing capital prices across cities would increase worker welfare and returns to capital by 2.6% and 11%, respectively. Further, forcing local leader to focus just on enhancing welfare of residents would increase welfare by another 5.3%. Reforms would significantly reduce the population of favored cities like Tianjin and Beijing, while raising that of cities like Shenzhen.
    Date: 2020–09
  19. By: Jeanne, Olivier; Sandri, Damiano
    Abstract: We use a tractable model to show that emerging markets can protect themselves from the global financial cycle by expanding (rather than restricting) capital flows. This involves accumulating reserves when global liquidity is high to buy back domestic assets at a discount when global financial conditions tighten. Since the private sector does not internalize how this buffering mechanism reduces international borrowing costs, a social planner increases the size of capital flows beyond the laissez-faire equilibrium. The model also provides a role for foreign exchange intervention in less financially developed countries. The main predictions of the model are consistent with the data.
    Keywords: capital flow management; capital controls; Capital Flows; Foreign Exchange Reserves; sudden stop
    JEL: F31 F32 F36 F38
    Date: 2020–09
  20. By: Javier Bianchi (Federal Reserve Bank of Minneapolis); César Sosa Padilla (University of Notre Dame/NBER)
    Abstract: In the past three decades, governments in emerging markets have accumulated large amounts of international reserves, especially those with fixed exchange rates. We propose a theory of reserve accumulation that can account for these facts. Using a model of endogenous sovereign default with nominal rigidities, we show that the interaction between sovereign risk and aggregate demand amplification generates a macroeconomic-stabilization hedging role for international reserves. Reserves increase debt sustainability to such an extent that financing reserves with debt accumulation may not necessarily lead to increases in spreads. We also study simple and implementable rules for reserve accumulation. Our findings sug- gest that a simple linear rule linked to spreads can achieve significant welfare gains, while those rules currently used in policy studies of reserve adequacy can be counterproductive.
    Keywords: International reserves Sovereign default Macroeconomic stabilization Fixed exchange rates Inflation targeting
    JEL: F32 F34 F41
    Date: 2020–12
  21. By: Hadzi-Vaskov, Metodij; Ricci, Luca Antonio
    Abstract: This study investigates the relationship between public debt and sovereign credit ratings, using a wide sample of over 100 advanced, emerging, and developing economies. It finds that: i) higher public debt lowers the probability of being placed in a higher rating category; ii) the negative debt-ratings relationship is nonlinear and depends on the rating grade itself; and iii) the identified nonlinearity explains the differential impact of debt on ratings in advanced economies versus emerging and developing economies (previously suggested in the literature as different relationships). These results hold for both gross and net debt, and are robust to alternative dependent variable definitions, analytical techniques, and empirical specifications.
    Keywords: Advanced economies; Credit rating agencies; Credit ratings; emerging markets; financial markets; non-linearities; public debt
    JEL: E44 E62 G15 G24
    Date: 2020–09
    Abstract: SMEs have a very important role towards society, being responsible for the production of a large part of the total goods and services, but also for stimulating competition, introducing innovative methods and for their importance in employability. In Mozambique, the credit capacity of SMEs is quite weak as the results point to the lack of organized accounting, insufficient collateral, reduced bargaining power, weak business management skills, and weaknesses in structuring business plans are challenges for SMEs to access bank financing. The main difficulty in applying for credit by companies is the existence of unattractive and uncompetitive rates and fees. The biggest problem related to accessing bank credit is the prohibitive collateral requirements and the problem of structural deficiencies, which cripple the economy.
    Keywords: Small and medium enterprises; Lending; Credit; Bank.
    JEL: M10
    Date: 2021–05–03
  23. By: Custódio, Cláudia; Mendes, Diogo; Metzger, Daniel
    Abstract: This paper studies the impact of a course in "Finance" for top managers of medium and large enterprises in Mozambique through a randomized controlled trial (RCT). Survey data and accounting data provide consistent evidence that managers change firm financial policies in response to finance education. The largest treatment ef- fect is on short-term financial policies related to working capital. Reductions in accounts receivable and inventories generate an increase in cash flows used to finance long-term investments. Those policy changes also improve the performance of the treated firms. Overall, our results suggest that relatively small and low-cost interventions, such as a standard executive education program in finance, can help firms to mitigate financial constraints and potentially affect economic development.
    Keywords: CEOs; Financial Education; financial literacy; Financing constraints; RCT
    JEL: D4 G30 J24 L25 M41 O16
    Date: 2020–09
  24. By: Román-Aso, Juan A.; Coca Villalba, Fernando; Mastral Franks, Vanessa; Bosch Frigola, Irene
    Abstract: In the last decades, a large number of academic contributions have investigated the access to credit from a great variety of perspectives. The aim of this paper is to develop an index of financial conditions to contrast subsequently, the impact of firm size and industry on it according to the information asymmetric theory. To that end, we implement a Principal Component Analysis with a database made up of 233 Spanish freelancers and MSMEs in 2018. This technique permits us to gather the objective facts and subjective perceptions of the surveyed by detecting common elements in their responses. Once components are identified, we run statistical tests to find out if firm size and industry explain the differences amongst companies. Our outcome only proves the theory for firm size, meanwhile the hypothesis remains unclear for industry
    Keywords: Index of financial conditions,Principal Components Analysis,Asymmetric information
    JEL: G20 G30 M21 M41
    Date: 2021
  25. By: Cecchetti, Stephen G; Schoenholtz, Kermit
    Abstract: Technology has long had a profound impact on financial services. Today, it is changing the range of services offered, as well as their delivery, cost, and accessibility. Yet, despite the explosion of small firms applying new technologies, very few of these new fintech companies have a broad influence on financial activity. Even in some sectors with significant entry, unit costs of financial intermediation remain stubbornly high. At the same time, there are notable fintech successes, especially in the provision of payments and credit in China. Going forward, the impact of fintech is likely to be greatest where existing suppliers lack competitive incentives or sophistication. Over the next decade, the decisions of regulators will have a profound influence on the array of financial services available, on how they are delivered and to whom. In the advanced economies, regulators generally support greater fintech competition, favoring lower costs and improved access. Furthermore, as Big Tech firms and large incumbent financial institutions vie for dominance, their large fintech investments will make them increasingly alike. Over time, it is anyone's guess which of these firm types will win the race.
    Keywords: big tech; Central bank digital currency; digital currency; financial innovation; financial institutions; financial regulation; Financial Services; Fintech; peer-to-peer lending; Remittances
    JEL: G20
    Date: 2020–10
  26. By: Chen, Shu; Gambacorta, Leonardo; Huang, Yiping; Li, Zhenhua; Qiu, Han
    Abstract: The use of massive amounts of data by large technology firms (big techs) to assess firms' creditworthiness could reduce the need for collateral in solving asymmetric information problems in credit markets. Using a unique dataset of more than 2 million Chinese firms that received credit from both an important big tech firm (Ant Group) and traditional commercial banks, this paper investigates how different forms of credit correlate with local economic activity, house prices and firm characteristics. We find that big tech credit does not correlate with local business conditions and house prices when controlling for demand factors, but reacts strongly to changes in firm characteristics, such as transaction volumes and network scores used to calculate firm credit ratings. By contrast, both secured and unsecured bank credit react significantly to local house prices, which incorporate useful information on the environment in which clients operate and on their creditworthiness. This evidence implies that a greater use of big tech credit â?? granted on the basis of machine learning and big data â?? could reduce the importance of collateral in credit markets and potentially weaken the financial accelerator mechanism.
    Keywords: asymmetric information; banks; Big Data; big tech; Collateral; credit markets
    JEL: D22 G31 R30
    Date: 2020–09
  27. By: Morais, Bernardo; Ormazabal, Gaizka; Peydró, José Luis; Roa, Monica; Sarmiento, Miguel
    Abstract: We show corporate-level real, financial, and (bank) risk-taking effects associated with calculating loan provisions based on expected-rather than incurred-credit losses. For identification, we exploit unique features of a Colombian reform and supervisory, matched loan-level data. The regulatory change induces a dramatic increase in provisions. Banks tighten all new lending conditions, adversely affecting borrowing-firms, with stronger effects for risky-firms. Moreover, to minimize provisioning, more affected (less-capitalized) banks cut credit supply to risky-firms- SMEs with shorter credit history, less tangible assets or more defaulted loans-but engage in "search-for-yield" within regulatory constraints and increase portfolio concentration, thereby decreasing risk diversification.
    Keywords: bank risk-taking; corporate real and credit supply effects of accounting; ECL; IFRS9; loan provisions
    JEL: E31 G18 G21 G28
    Date: 2020–09
  28. By: Oľga Pastiranová; Jiří Witzany
    Abstract: The purpose of this paper is to empirically analyse the behaviour of expected loan loss provisions during the economic cycle. Provisioning rules under IFRS 9 require creation of the expected credit losses, which have been anticipated to behave countercyclically, and so replaced the rules under IAS 39 widely presumed to have procyclical impact. Observing the dynamics of the economic cycle during the economic downturn resulting from the COVID restrictions, a panel regression has been performed to test the hypothesis that loan loss provisioning rules under IFRS 9 have procyclical impact. The hypothesis was confirmed within the period of 1Q 2015 – 3Q 2020 on the sample of the member countries of the European Union.
    Date: 2021–04–16
  29. By: Reghezza, Alessio; Altunbas, Yener; Marqués-Ibáñez, David; Rodriguez d’Acri, Costanza; Spaggiari, Martina
    Abstract: Do climate-oriented regulatory policies affect the flow of credit towards polluting corporations? We match loan-level data to firm-level greenhouse gas emissions to assess the impact of the Paris Agreement. We find that, following this agreement, European banks reallocated credit away from polluting firms. In the aftermath of President Trump’s 2017 announcement that the United States was withdrawing from the Paris Agreement, lending by European banks to polluting firms in the United States decreased even further in relative terms. It follows that green regulatory initiatives in banking can have a significant impact combating climate change. JEL Classification: E51, G28, H23
    Keywords: climate change, difference-in-differences, loan-level data, Paris Agreement, Trump
    Date: 2021–05
  30. By: De Haas, Ralph; Martin, Ralf; Muûls, Mirabelle; Schweiger, Helena
    Abstract: We use data on 11,233 firms across 22 emerging markets to analyze how credit constraints and low-quality firm management inhibit corporate investment in green technologies. For identification we exploit quasi-exogenous variation in local credit conditions and in exposure to weather shocks. Our results suggest that both financial frictions and managerial constraints slow down firm investment in more energy efficient and less polluting technologies. Complementary analysis of data from the European Pollutant Release and Transfer Register (E-PRTR) corroborates some of this evidence by revealing that in areas where banks deleveraged more after the global financial crisis, industrial facilities reduced their carbon emissions by less. On aggregate this kept local emissions 15% above the level they would have been in the absence of financial frictions.
    JEL: D22 L23 G32 L20 Q52 Q53
    Date: 2021–05–17

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