Pension reform, institutional investors’ growth and stock market development in the developing countries: does it function?

In this paper, we evaluate an empirical link between recent institutional assets’ growth, institutional behaviour and stock market performance in the developing countries. Using the GMM technique on the panel of eight Central and Eastern European (CEE) developing countries over the period of 1995-2006, our results indicate that institutional development exerts a robust and significant impact on the securities markets’ growth in the developing countries. In particular, we find that institutional investors contribute to the greater activity of the emerging capital markets and this effect is a result of higher demand for the local securities induced by these institutions. In addition, in countries where the institutional investors actively participate in the corporate governance, their presence possibly reduces the cost of capital for firms and also positively influences the stock market capitalization. Our findings suggest that the pension reform has contributed significantly to the institutional development and stock market growth in the CEE countries.capital market development, capital market reforms, financial structure, institutional investors, pension reform

The Economic Determinants and Engagement Models of Foreign Banks in Central Europe

In the last fifteen years foreign banks have expanded their presence significantly in almost all developing economies. The transition countries are among those economies that have experienced one of the highest levels of banking internationalization in the world. The foreign controlled banking asset in these countries ranges from 70 per cent in Poland to almost 100 per cent in Slovakia. With our study using panel data we examine the economic determinants of foreign bank engagement in the four local banking markets in Central Europe during the period 1994-2004. In addition, we study whether the economic determinants affect different entry vehicles of foreign banks into the Central European markets. Our results show that the most important factors determining foreign bank engagements were (i) large potential of the Central European banking markets and low degree of their financial sophistication (ii) the legal origin of the home country, (iii) the size of the economic growth rates differentials between host and home markets, and (iv) finally the distance between the host country and the foreign bank headquarter. We also find that most foreign banks investments occurred in the period of poor creditor rights protection. Moreover, our results present that the economic determinants had an impact on the decision of the organization form of the foreign banks entering the Central European banking markets. Our results are robust to several controls, including the lack of independence of investment decisions.international banking, foreign direct investment, foreign bank, vehicle of foreign bank entry, Central Europe

Why do Foreign Banks Withdraw from other Countries? A Panel Data Analysis

This paper describes the trends in foreign bank ownership across the world and presents, for the first time, empirical evidence of the causes of multinational banks’ exits from other countries. Using panel data for 149 closed or divested foreign bank subsidiaries across 54 countries from 1997 to 2009, we show that the problems encountered by subsidiaries were not the main cause of divestment by parent banks. Based on data for the parent banks of the closed subsidiaries, our results show that those parent banks reported significant financial weaknesses prior to closing their international operations. Therefore, we assume that a multinational bank’s decision to close or sell a subsidiary in another country is based mainly on problems in the home country, with a lesser factor being the weak performance of the foreign subsidiary.foreign banks, subsidiary, divestment, performance

Financial systems - importance, differences and convergence

This paper provides an overview of conceptual issues and recent research findings concerning the structure and the role of financial systems and an introduction into the new research area of comparative financial systems. The authors start by pointing out the importance of financial systems in general and then sketch different ways of describing and analysing national financial systems. They advocate using what they call a “systemic approach”. This approach focuses on the fit between the various elements that constitute any financial system as a major determinant of how well a given financial system performs its functions. In its second part the paper discusses recent research concerning the relationships between financial sector development and general economic growth and development. The third part is dedicated to comparative financial systems. It first analyses the similarities and, more importantly, the differences of the financial systems of major industrialised countries and points out that these differences seem to remain in existence in spite of the current wave of liberalisation, deregulation and globalisation. This leads to the concluding discussion of what the systemic approach suggests with respect to the question of whether the financial systems of different countries are likely to converge to a common structure. Key words: Financial sector, financial system, growth and development, convergence JEL classification: G32, G34, G3

Bank resolution mechanisms: how to prepare for a birthday with an imperfect plan

Some bank mechanisms can help reduce idiosyncratic, but not necessarily systemic, risk, write Aneta Hryckiewicz, Natalia Kryg and Dimitrios P. Tsomoco

The problem with government interventions: The wrong banks, inadequate strategies, or ineffective measures?

The most recent crisis prompted regulatory authorities to implement directives prescribing actions to resolve systemic banking crises. Recent findings show that government intervention results in only a small proportion of bank recoveries. This study examines the reasons for this failure and evaluates the effectiveness of regulatory instruments, demonstrating that weaker banks are more likely to receive government support, that the support extended addresses banks’ specific issues, and that supported banks are more likely to face bankruptcy than non-supported banks. Therefore, government interventions must be sufficiently large, and an optimal banking recovery program must include a deep restructuring process

Originators, traders, neutrals, and traditioners – various banking business models across the globe. Does the business model matter for financial stability?

Why were some banks heavily affected by mortgage crises, while others barely? Why were some banking sectors dominated by “originate and distribute” model, while others were trading? Why did some banks decide not to follow the others, and preferred to stay traditional banks? How the models chosen by banks translated into their risk-return profiles? And finally, which banking model makes the world safer? This article raises these issues. It shows that heterogeneity in the banking industry before the mortgage crisis was huge. We document that institutional factors were largely responsible for the development of individual banking models in single countries. We find that the most risky banking model is when banks specialize in trading and do not diversify. Therefore, the most “optimal” from risk-return profile seems to be the “balanced” model. The traditional model though appears as systemically the least risky, it does not allow banks to achieve sufficient return

The problem with government interventions: The wrong banks, inadequate strategies, or ineffective measures?

The most recent crisis prompted regulatory authorities to implement directives prescribing actions to resolve systemic banking crises. Recent findings show that government intervention results in only a small proportion of bank recoveries. This study examines the reasons for this failure and evaluates the effectiveness of regulatory instruments, demonstrating that weaker banks are more likely to receive government support, that the support extended addresses banks’ specific issues, and that supported banks are more likely to face bankruptcy than non-supported banks. Therefore, government interventions must be sufficiently large, and an optimal banking recovery program must include a deep restructuring process

The problem with government interventions: The wrong banks, inadequate strategies, or ineffective measures?

The most recent crisis prompted regulatory authorities to implement directives prescribing actions to resolve systemic banking crises. Recent findings show that government intervention results in only a small proportion of bank recoveries. This study examines the reasons for this failure and evaluates the effectiveness of regulatory instruments, demonstrating that weaker banks are more likely to receive government support, that the support extended addresses banks’ specific issues, and that supported banks are more likely to face bankruptcy than non-supported banks. Therefore, government interventions must be sufficiently large, and an optimal banking recovery program must include a deep restructuring process

Banking business models and the nature of financial crises

In our paper we analyze the heterogeneity between various business models among systemically important banks in 65 countries over the period of 2000-2012. For the first time, we are able to identify true banking strategies consisting of different combinations of bank asset and funding sources and assess their impact on the mortgage crisis. We then estimate how distinct strategies have affected bank profitability and risk before the crisis, and what impact they have put on the mortgage crisis. Our results prove that the asset structure of banks was responsible for the systemic risk before the mortgage crisis, whereas the liability structure was responsible for the crisis itself. Finally, we show that countries with banks that rely on investment activities experienced a greater but more short-lived drop in GDP compared to countries that have a predominantly traditional banking sector