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on Financial Development and Growth |
| By: | Mr. Ross Levine |
| Abstract: | Finance and growth emerged as a distinct field of economics during the last three decades as economists integrated the fields of finance and economic growth and then explored the ramifications of the functioning of financial systems on economic growth, income distribution, and poverty. In this paper, I review theoretical and empirical research on the connections between the operation of the financial system and economic growth and inequality. While subject to ample qualifications, the preponderance of evidence suggests that (1) financial development—both the development of banks and stock markets—spurs economic growth and (2) better functioning financial systems foster growth primarily by improving resource allocation and technological change, not by increasing saving rates. Some research also suggests that financial development expands economic opportunities and tightens income distribution, primarily by boosting the incomes of the poor. This work implies that financial development fosters growth by expanding opportunities. Finally, and more tentatively, financial innovation—improvements in the ability of financial systems to ameliorate information and transaction costs—may be necessary for sustaining growth. |
| Keywords: | spurs economic growth; producing information; incomes of the poor; fields of finance; cost of capital; resource allocation; Financial sector development; Income distribution; Income inequality; Stock markets; Income; Global |
| Date: | 2021–06–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/164&r= |
| By: | Ms. Sumiko Ogawa; Purva Khera; Miss Stephanie Y Ng; Ms. Ratna Sahay |
| Abstract: | Digital financial services have been a key driver of financial inclusion in recent years. While there is evidence that financial inclusion through traditional services has a positive impact on economic growth, do the same results carry over for digital financial inclusion? What drives digital financial inclusion? Why does it advance more in some countries but not in others? Using new indices of financial inclusion developed in Khera et. al. (2021), this paper addresses these questions for 52 developing countries. Using cross-sectional instrument variable procedure, we find that the exogenous component of digital financial inclusion is positively associated with growth in GDP per capita during 2011-2018, which suggests that digital financial inclusion can accelerate economic growth. Fractional logit and random effects empirical estimation identifies access to infrastructure, financial and digital literacy, and quality of institutions as key drivers of digital financial inclusion. These findings are then used to help inform policy recommendations in areas related to the digitization of financial services to promote financial inclusion. |
| Keywords: | A. literature review; digitization of financial services; capital markets department; growth rate; Digital financial services; number in bracket; regression equation; Financial inclusion; Mobile banking; Middle East and Central Asia; Caribbean; Asia and Pacific |
| Date: | 2021–06–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/167&r= |
| By: | Nader AlKathiri (Department of Economics, University of Sussex, Falmer, United Kingdom); Sambit Bhattacharyya (Department of Economics, University of Sussex, Falmer, United Kingdom) |
| Abstract: | We investigate the effect of credit creation on real value added in manufacturing, services and agriculture and whether the effect is conditional on the level of development (saturation effect). We also investigate potential heterogeneity across credit types (households and non-financial corporations) and the significance of credit impulse (or new credit creation). Using a sample of up to 95 countries covering the period 1970 to 2017, we find that private credit has strong positive effects on manufacturing value added but not on agriculture and services. We also find evidence of credit saturation across all three sectors even though the effect is noticeably weaker in agriculture. The unbundled effects of household and non-financial corporation credit on value added in manufacturing and services are statistically significant. We also do not find any effect of credit impulse. |
| JEL: | D72 O11 |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:sus:susewp:1121&r= |
| By: | Valdivia Coria, Joab Dan; Valdivia Coria, Daney David |
| Abstract: | Since financial crisis in 2008 and global health crisis COVID-19, systemic risk monitoring has become a relevant variable to anticipate possible credit crunch episodes. In this paper a Composite Indicator of Systemic Stress (CISS) was constructed for Guatemala, throughout recursive Panel Vector Autoregressive Regression (PVAR) adverse effects on the performance of the economy were estimated. Results shows that shocks in systemic risk generate a fall between 0.04pp and 0.05pp on economic growth with different persistence, when the CISS is at low or high stress levels, respectively. |
| Keywords: | Systemic Risk, Financial Stability, Panel VAR, recursive estimation. |
| JEL: | C51 E44 G29 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:110669&r= |
| By: | Simplice A. Asongu (Yaounde, Cameroon); Valentine B. Soumtang (Yaoundé, Cameroon); Ofeh M. Edoh (Yaoundé, Cameroon) |
| Abstract: | The study assesses how financial institution dynamics have affected poverty and the severity of poverty in 42 sub-Saharan African countries for the period 1980-2019. In order to increase for policy relevance of the study, three financial development indicators are used, namely: financial institutions depth, financial institutions access and financial institutions efficiency. The adopted empirical strategy is a quantile regressions approach which enables the study to assess how financial institutions dynamics affect poverty and the severity of poverty throughout the conditional distribution of poverty and severity of poverty. The findings show various tendencies, inter alia: (i) financial institutions depth (efficiency) consistently decreases the severity of poverty (poverty headcount) and (ii) financial institutions access consistently decreases both poverty and the severity of poverty and the decreasing effect increases with increasing levels of poverty in the top quantiles and throughout the conditional distribution of the severity of poverty. Policy implications are discussed with respect of SDG1 on poverty reduction. |
| Keywords: | financial development; poverty alleviation; Africa |
| JEL: | G20 I10 I20 I30 O10 |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:exs:wpaper:21/081&r= |
| By: | Simplice A. Asongu (Yaounde, Cameroon); Valentine B. Soumtang (University of Yaoundé II, Cameroon); Ofeh M. Edoh (Yaoundé, Cameroon) |
| Abstract: | This study assesses financial determinants of informal financial sector development in 48 Sub-Saharan African countries for the period 1995-2017. Quantile regressions are used as the empirical strategy which enables the study to assess the determinants throughout the conditional distribution of informal sector development dynamics. The following financial determinants affect informal financial development and financial informalization differently in terms of magnitude and sign: bank overhead costs; net internet margin; bank concentration; return on equity; bank cost to income ratio; financial stability; loans from non-resident banks; offshore bank deposits and remittances. The determinants are presented from a plethora of perspectives, inter alia: U-Shape, S-Shape and positive or negative thresholds. The study not only provides a practical way by which to assess the incidence of financial determinants on informal financial sector development, but also provides financial instruments by which informal financial development can be curbed. |
| Keywords: | Informal finance; financial development; Africa |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:agd:wpaper:21/077&r= |
| By: | Nathanael Ojong (York University, Toronto, Canada); Simplice A. Asongu (Yaoundé, Cameroon) |
| Abstract: | This chapter examines how the Covid-19 pandemic has affected financial development and financial inclusion in African countries. The study provides both broad perspectives and country-specific frameworks based on selected country cases studies. Some emphasis is placed on the achievement of sustainable development goals (SDGs) that are related to financial inclusion. The study aims to understand what immediate challenges the COVID-19 pandemic has represented to the economies and societies on the one hand and on the other, the effect of the COVID-19 on the interconnected financial systems in terms of consequences of the pandemic. The relevance of the study builds on the importance of these insights in helping both scholars and policy makers understand how the effect of the pandemic on the financial system and by extension, the global economy can be mitigated for more financial inclusion. |
| Keywords: | Covid-19 pandemic; financial development; Financial inclusion; Africa |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:agd:wpaper:21/078&r= |
| By: | Ghosh, Saurabh; Mazumder, Debojyoti |
| Abstract: | In this paper, we try to explain the role of Non-bank Financial Intermediation (NBFI) to percolate and propel a real shock to the rest of the economy through the bank-NBFI interactions. We propose a simple theoretical model which identifies the channels and distinguishes between idiosyncratic, structural and sectoral shocks, cleanly. In our model, the non-deposit taking Non-bank Financial companies (NBFCs) which are the provider of risky, small and fragmented loans, are financed by borrowing from commercial banks. This link connects the NBFCs with the commercial banks and, in turn, with the rest of the economy. A higher realization of the failed firms (idiosyncratic shock) in the NBFC financed sector and a rise in the sector-wide productivity risk (sectoral risk) increase the interest rate charged by the banks and unemployment rate but reduces the real wages and per capita capital formation of the economy. However, when the average number of failed firms increases (structural shock), the reverse happens. |
| Keywords: | NBFC, Bank-NBFC interaction, Real Shock, Search and matching unemployment |
| JEL: | E44 G21 G23 J64 |
| Date: | 2021–11–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:110596&r= |
| By: | Kaelo Mpho Ntwaepelo |
| Abstract: | This paper examines the macroeconomic effects of the macroprudential and monetary policy shocks, in a framework where the policies target both the price and financial stability objectives. I employ the system-generalised method of moments (system-GMM) technique in a dynamic panel data model, over the 1990-2016 period. The study uses the novel integrated macroprudential policy dataset (iMaPP) in the context of the five major emerging market economies: Brazil, Russia, India, China and South Africa (BRICS). The results indicate that a contractionary monetary policy shock eliminates the excessive growth of credit and house prices but increases the price levels (price puzzle). The presence of a price puzzle after a contractionary monetary policy shock indicates that there is a trade-off between the financial stability and price stability objectives. Similarly, the impulse response function analysis reveals the presence of a negative correlation between the financial variables and output, after a contractionary macroprudential policy shock. Overall, the empirical findings suggest that there is a policy conflict when the policies respond to additional objectives beyond their primary targets. It is therefore beneficial for each policy to focus on its primary objective while considering the spillover effects of the other policy. |
| Keywords: | emerging markets, macroprudential policy, financial stability, monetary policy, price stability |
| JEL: | E58 E61 G28 |
| Date: | 2021–11–10 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:emxxdp:em-dp2021-20&r= |
| By: | Ryan Niladri Banerjee; José María Serena Garralda |
| Abstract: | Direct lenders, non-bank credit intermediaries with low leverage, have become increasingly important players in corporate loan markets. In this paper we investigate the role they play in the monetary policy transmission mechanism, using syndicated loan data covering the 2000-2018 period. We show that direct lenders are more likely to join loan syndicates whenever monetary policy announcements trigger a contraction in borrowers' net worth irrespective of the directional change in interest rates. Thus, our findings suggest that direct lenders dampen the financial accelerator channel of monetary policy. |
| Keywords: | direct lending, monetary policy, financial accelerator, credit channel |
| JEL: | G21 G32 F32 F34 |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:979&r= |
| By: | Grimm, Niklas; Laeven, Luc; Popov, Alexander |
| Abstract: | To what extent can Quantitative Easing impact productivity growth? We document a strong and heterogeneous response of corporate R&D investment to changes in debt financing conditions induced by corporate debt purchases under the ECB’s Corporate Sector Purchase Program. Companies eligible for the program increase significantly their investment in R&D, relative to similar ineligible companies operating in the same country and sector. The evidence further suggests that by subsidizing the cost of debt, corporate bond purchases by the central bank stimulate innovation through a wealth transfer to innovative companies with low debt levels, rather than by supporting credit constrained firms. JEL Classification: E5, G10, O3 |
| Keywords: | corporate innovation, productivity growth, quantitative easing, unconventional monetary policy |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212615&r= |
| By: | Beniamino Pisicoli (DEF, University of Rome "Tor Vergata") |
| Abstract: | In this paper we investigate the influence of banking and financial diversity on stability. We compute an index of banking diversity for Italian provinces and, drawing from network theory, we propose a measure of the diversity and development of the overall provincial financial sector. Our results show that diversity in the banking and financial markets promotes greater stability. Such beneficial effects are particularly evident during periods of financial distress. We ascribe our findings to the better diversification achieved by more diverse financial systems, as documented by lower loans concentration and higher loans diversification in terms of economic destination and borrower category. |
| Keywords: | financial diversity; financial stability; non-performing loans; financial complexity; financial crises; banking diversity |
| JEL: | G01 G20 P34 |
| Date: | 2021–11–09 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:526&r= |
| By: | Fortin, Ines (Macroeconomics and Business Cycles, Institute for Advanced Studies, Vienna, Austria); Hlouskova, Jaroslava (Macroeconomics and Business Cycles, Institute for Advanced Studies, Vienna, Austria and Dept. of Economics, Faculty of National Economy, University of Economics in Bratislava, Slovakia); Soegner, Leopold (Macroeconomics and Business Cycles, Institute for Advanced Studies, Vienna, Austria and Vienna Graduate School of Finance (VGSF), Vienna, Austria) |
| Abstract: | We estimate new indices measuring financial and economic (in)stability in Austria and in the euro area. Instead of estimating the level of (in)stability in a financial or economic system we measure the degree of predictability of (in)stability, where our methodological approach is based on the uncertainty index of Jurado, Ludvigson and Ng (2015). We perform an impulse response analysis in a vector error correction framework, where we focus on the impact of uncertainty shocks on industrial production, employment and the stock market. We and that financial uncertainty shows a strong significantly negative impact on the stock market, for both Austria and the euro area, while economic uncertainty shows a strong significantly negative impact on the economic variables for the euro area. We also perform a forecasting analysis, where we assess the merits of uncertainty indicators for forecasting industrial production, employment and the stock market, using different forecast performance measures. The results suggest that financial uncertainty improves the forecasts of the stock market while economic uncertainty improves the forecasts of macroeconomic variables. We also use aggregate banking data to construct an augmented financial uncertainty index and examine whether models including this augmented financial uncertainty index outperform models including the original financial uncertainty index in terms of forecasting. |
| Keywords: | financial (in)stability, uncertainty, financial crisis, forecasting, stochastic volatility, factor models |
| JEL: | C53 G01 G20 E44 |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihswps:36&r= |
| By: | Kenichi Ueda (The University of Tokyo, TCER, and CEPR); Kei Uzui (The University of Tokyo) |
| Abstract: | Seven years after the Global Financial Crisis (GFC), we investigate how the recoveries are affected by policies and pre-crisis conditions. We find that the macroeconomic and credit-enhancing policies are not beneficial, perhaps detrimental, to the recovery from the GFC, based on the cross-country regression study using 38 countries. However, sound pre-crisis conditions help countries to recover from the crisis more quickly, especially, the low government debt to GDP ratio, the ample foreign reserves, and the absence of a real estate boom. Thus, monitoring those variables is a key to preventing a future crisis or to getting out of it more quickly. |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf528&r= |
| By: | Jiang, Sheila (University of Florida); Li, Ye (Ohio State University); Xu, Douglas (University of Chicago) |
| Abstract: | Our paper provides the first cross-country evidence on the distinct dynamics of tangible and intangible investments during and after the global financial crisis. The pre-crisis rise of intangible-to-tangible capital ratio was reversed outside the U.S. due to a greater decline of intangible investment and a much slower recovery. Tangible capital can be externally financed, and its post-crisis recovery benefits from the restoration of credit supply. In contrast, Intangible investment relies on firms’ liquidity holdings that were drawn down in the crisis and can only be rebuilt gradually through retained profits. We provide a unified account of the findings through a dynamic model of corporate investment and liquidity management. Consistent with our model predictions, the divergence between tangible and intangible investments is more prominent in countries with weaker intellectual property protection (less external financing options for intangibles) and riskier government bonds (less robust corporate liquidity holdings). |
| JEL: | E22 E23 E41 E44 G01 G15 G31 G32 |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2021-19&r= |
| By: | Sebastian Doerr; Stefan Gissler; Jose-Luis Peydro; Hans-Joachim Voth |
| Abstract: | Do financial crises radicalize voters? We study Germany's 1931 banking crisis, collecting new data on bank branches and firm-bank connections. Exploiting cross- sectional variation in pre-crisis exposure to the bank at the center of the crisis, we show that Nazi votes surged in locations more affected by its failure. Radicalization in response to the shock was exacerbated in cities with a history of anti- Semitism. After the Nazis seized power, both pogroms and deportations were more frequent in places affected by the banking crisis. Our results suggest an important synergy between financial distress and cultural predispositions, with far-reaching consequences. |
| Keywords: | financial crisis, political extremism, populism, anti-Semitism, culture, Great Depression |
| JEL: | E44 G01 G21 N20 P16 |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:978&r= |
| By: | Igor Livshits; Youngmin Park |
| Abstract: | This paper offers a simple theory of inefficiently lax financial regulation arising as an outcome of a democratic political process. Lax financial regulation encourages some banks to issue risky residential mortgages. In the event of an adverse aggregate housing shock, these banks fail. When banks do not fully internalize the losses from such failure (due to limited liability), they offer mortgages at less than actuarially fair interest rates. This opens the door to home ownership for young, low net-worth individuals. In turn, the additional demand from these new home-buyers drives up house prices. This leads to a non-trivial distribution of gains and losses from lax regulation among households. On the one hand, renters and individuals with large non-housing wealth suffer from the fragility of the banking system. On the other hand, some young, low net-worth households are able to get a mortgage and buy a house, and current (old) home-owners benefit from the increase in the price of their houses. When these latter two groups, who benefit from the lax regulation, constitute a majority of the voting population, then regulatory failure can be an outcome of the democratic political process. |
| Keywords: | Financial stability; Financial system regulation and policies; Housing; Interest rates |
| JEL: | E44 E63 G12 |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:21-59&r= |
| By: | Ding Ding; Ana Lariau; Fabio Di Vittorio; Yue Zhou |
| Abstract: | Over the last decade China’s investment in Latin America and the Caribbean (LAC) has increased substantially in volume and become more diversified from natural resources to other industries. Using cross-border mergers and acquisitions data, we demonstrate that since mid-2010s China’s overseas investment has tilted toward sectors where China has a comparative advantage in the global markets, a trend similar to that of other major foreign direct investment (FDI) source countries. Moreover, China’s rising overseas investment can be linked to the rebalancing of Chinese economy, and LAC stands to benefit from its complementarity vis-à-vis China in sectors where the rising Chinese overseas investment can be met with LAC’s own investment gaps. The COVID-19 pandemic could have a long-lasting impact on global value chains and FDI flows, which poses both challenges and opportunities to LAC in attracting FDI, including from China, to support the region’s long-run economic development. |
| Keywords: | FDI flow; overseas investment; ding ding; China-LAC investment linkage; investment behavior; Foreign direct investment; Comparative advantage; Electricity; Real effective exchange rates; Exports; Caribbean; Global; Asia and Pacific; North Africa; Central Asia |
| Date: | 2021–06–07 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/160&r= |
| By: | Simon Paetzold; Mizuho Kida |
| Abstract: | The Financial Action Task Force’s gray list publicly identifies countries with strategic deficiencies in their AML/CFT regimes (i.e., in their policies to prevent money laundering and the financing of terrorism). How much gray-listing affects a country’s capital flows is of interest to policy makers, investors, and the Fund. This paper estimates the magnitude of the effect using an inferential machine learning technique. It finds that gray-listing results in a large and statistically significant reduction in capital inflows. |
| Keywords: | capital flows, AML/CFT, gray list, machine learning, emerging market economies; inferential machine learning technique; gray-listing affect; analysis using machine learning; gray list; coefficient estimate; Capital flows; Capital inflows; Anti-money laundering and combating the financing of terrorism (AML/CFT); Machine learning; Foreign direct investment; Global |
| Date: | 2021–05–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/153&r= |
| By: | Ergys Islamaj (World Bank); M. Ayhan Kose (World Bank, Brookings Institution, CAMA, and CEPR) |
| Abstract: | Cross-border capital flows are expected to lead to increased international risk sharing by facilitating borrowing and lending in global financial markets. This paper examines risk-sharing outcomes of various types of capital flows (foreign direct investment, portfolio equity, debt, remittance, and aid flows) in a large sample of emerging market and developing economies. The results suggest that remittances and aid flows are associated with increased international risk sharing. Other types of capital flows are not consistently correlated with better risk-sharing outcomes. These findings are robust to the use of different econometric specifications, country-specific characteristics, and other controls. |
| Keywords: | Capital flows; remittances; aid flows, international risk sharing. |
| JEL: | E1 F02 F4 G01 |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:2122&r= |
| By: | Ms. Diva Singh; Luiza Antoun de Almeida; Victor Hugo C. Alexandrino da Silva |
| Abstract: | In recent years, we have observed an increase in low-income countries’ (LICs) access to international capital markets, especially after the Global Financial Crisis (GFC). This paper investigates what factors—country-specific macroeconomic fundamentals and/or external variables—have contributed to the surge in external bond issuance by these LICs, which we refer to in our paper as ‘frontier economies’. Using data on public and publicly guaranteed (PPG) external bond issuance, outstanding PPG bond stock, as well as sovereign spreads, we employ panel data analysis to examine factors related to the increase in issuance by these economies as well as the reduction in their spreads over time. Our empirical study shows that both country-specific fundamentals (such as public debt, current account balance, level of reserves, quality of institutions) and external variables (such as US growth and the VIX index) play a role in explaining the increased amount of issuance and the decline in spreads of frontier economies’ sovereign bonds. The impact of some of these variables on issuance appears to reflect a country’s need to issue bonds for external financing (‘the supply side’ of bond issuance), while others appear to correlate more through their impact on investors’ appetite for a country’s debt (‘the demand side’). In addition, the impact of country-specific variables can also be affected by external factors such as global risk appetite. Our analysis of key factors that have contributed to increased market access for frontier economies over the past decade provides important information to gauge the prospects for their continued market access, and for other LICs to join this group by tapping international markets for the first time. |
| Keywords: | frontier economy; market access; PPG bond stock; PPG issuance; data on public and publicly guaranteed; Bonds; International capital markets; Public and publicly-guaranteed external debt; Emerging and frontier financial markets; Stocks; Global |
| Date: | 2021–05–07 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/137&r= |
| By: | Mr. Nicolas E Magud; Delong Li; Samantha Witte; Alejandro M. Werner |
| Abstract: | We analyze the long-run impact of emerging-market sovereign bond yields on corporate bond yields, finding that the average pass-through is around one. The pass-through is larger in countries with greater sovereign risks and where sovereign bonds are more liquid. It is also greater for corporate bonds with lower ratings, shorter maturities, and for those issued by financial companies and government-related firms. Our results support theoretical arguments that corporate and sovereign yields are linked together through credit risks and liquidity premiums. Consequently, high sovereign risks may slowdown growth by persistently increasing private sector borrowing costs. |
| Date: | 2021–06–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/155&r= |
| By: | Kowalewski (IESEG School of Management, UMR 9221 - LEM - Lille Economie Management, Lille, France Univ. Lille, UMR 9221 - LEM - Lille Economie Management, Lille, France CNRS, UMR 9221 - LEM - Lille Economie Management, Lille, France Institute of Economics, Polish Academy of Sciences, Warsaw, Poland); Pawel Pisany (Institute of Economics, Polish Academy of Sciences, Warsaw, Poland) |
| Abstract: | In this study, we investigate how governance quality determines the lending behavior of foreign-owned banks in emerging host markets. We do this by employing a dataset that includes foreign banks from 45 developed markets operating in 58 emerging markets. We incorporate direct measures of governance quality as well as home–host country distance in governance quality. Additionally, we investigate foreign banks’ lending behavior during the 2008-2009 financial crisis (GFC). We document that more micro-oriented governance dimensions, such as business regulatory quality and corruption control, play a role for foreign banks. Furthermore, we show that home–host distance in governance quality shapes lending behaviors to a greater extent than the quality in host markets itself. We also show that governance quality proximity between home and host markets fostered emerging economies’ resilience during the GFC to a greater extent than quality as a standalone. |
| Keywords: | : foreign banks, lending, emerging markets, governance quality, crisis |
| JEL: | G01 G21 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:ies:wpaper:f202108&r= |
| By: | Nicolás de Roux |
| Abstract: | Credit reporting systems have become a widespread tool to assess the creditworthiness of prospective borrowers. This paper studies the implications for credit access of using them in contexts where exogenous and transitory shocks affect income and repayment. Using a novel administrative data set with the near universe of formal loans to coffee producers in Colombia together with data from close to 1,200 rainfall stations, I show that transitory weather shocks lead to lower rates of loan repayment, lower credit scores, and more frequent denials of future loan applications. I present evidence that affected producers' incomes and ability to repay recover more quickly from shocks than credit access. This implies that these producers become credit constrained despite their ability to repay a loan. Insurance, contingency-dependent repayment schemes, or the inclusion of information on exogenous shocks in credit scoring models have the potential to alleviate the problem. |
| Keywords: | Shocks, Credit Reports, Access to Credit |
| JEL: | G21 O12 O13 Q12 Q14 Q54 |
| Date: | 2021–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:col:000089:019769&r= |
| By: | Natalia Rigol; Benjamin N. Roth |
| Abstract: | One of the most important puzzles in microfinance is the low rate of borrower graduation to larger, more flexible loans. Utilizing observational and experimental data from a large Chilean microfinance institution, we demonstrate that loan officers impede borrower graduation due to common features of their compensation contracts. Our partner lender offers both microloans and larger, more flexible graduation loans, and relies on loan officer endorsements to determine borrower graduation. Loan officers are rewarded for the size of their portfolio and repayment, and so are implicitly penalized when good borrowers graduate. In an experiment designed to isolate strategic disclosure, we modify compensation to reduce this implicit penalty and document that loan officers withheld endorsements of their most qualified borrowers prior to the shift. Graduated borrowers endorsed after the shift are 34% more profitable for our partner lender than those endorsed beforehand. A back-of-the- envelope calculation suggests that strategic behavior of loan officers accounts for $4.8-29.2 billion in lost social value from forgone borrower graduations in microfinance worldwide. Our experimental design may prove useful for other experiments within firms. |
| JEL: | G21 M52 O16 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29427&r= |
| By: | Li, Ye (Ohio State University); Li, Yi (Board of Governors of the Federal Reserve System) |
| Abstract: | Deposits finance bank lending and serve as means of payment for bank customers. Under uncertain payment flows, deposits are debts with random maturities. Payment outflows drain reserves, and the risk is most prominent when funding markets are under stress and banks are unable to smooth out payment shocks. We provide the first evidence on the negative impact of payment risk on bank lending, bridging the literatures on payment systems and credit supply. An interquartile increase in payment risk is associated with a decline in loan growth rate that is 10% of standard deviation. Our findings are stronger in times of funding stress and robust across banks of different sizes and loans of long and short maturities. Banks with higher payment risk raise deposit rates to expand customer base and internalize payment flows. Finally, we show that payment risk dampens the bank lending channel of monetary policy transmission. |
| JEL: | E42 E43 E44 E51 E52 G21 G28 |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2021-17&r= |
| By: | Raphael Auer; Jon Frost; Leonardo Gambacorta; Cyril Monnet; Tara Rice; Hyun Song Shin |
| Abstract: | In just a few years, central banks have rapidly ramped up their research and development effort on central bank digital currencies (CBDCs). A growing body of economic research informs these activities, often focusing on the "reserves for all" aspect of CBDCs for retail use. However, CBDCs should be considered in the full context of the digital economy and the centrality of data, which raises concerns around competition, payment system integrity and privacy. This paper gives a guided tour of the growing literature on CBDCs on the microeconomic considerations related to operational architectures, technologies and privacy, and the macroeconomic implications for the financial system, financial stability and monetary policy. A set of questions, particularly on the cross-border dimensions of CBDCs, remains unresolved, and calls for further work to expand the research frontier. |
| JEL: | C72 C73 D4 E42 E58 G21 O32 L86 |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:976&r= |
| By: | Erik Feyen; Jon Frost; Harish Natarajan; Tara Rice |
| Abstract: | Proposals for global stablecoins have put a much-needed spotlight on deficiencies in financial inclusion and cross-border payments and remittances in emerging market and developing economies (EMDEs). Yet stablecoin initiatives are no panacea. While they may achieve adoption in certain EMDEs, they may also pose particular development, macroeconomic and cross-border challenges for these countries and have not been tested at scale. Several EMDE authorities are weighing the potential costs and benefits of central bank digital currencies (CBDCs). We argue that the distinction between token-based and account-based money matters less than the distinction between central bank and non-central bank money. Fast-moving fintech innovations that are built on or improve the existing financial plumbing may address many of the issues in EMDEs that both private stablecoins and CBDCs aim to tackle. |
| JEL: | E42 E51 E58 F31 G28 O33 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:973&r= |