Creditor country regulations and commercial bank lending to developing countries

Ever since the debt crisis of 1982, commercial banks continue to be reluctant in lending to developing countries. It is often argued that regulatory pressures on commercial banks have also contributed to the banks'reduced exposure to developing countries. This paper explores this possibility, focusing particularly on the effect of the Bank for International Settlement (BIS) risk-related capital adequacy regulations and different practices of country risk provisioning in major creditor countries. The main conclusion of the paper is that the BIS capital adequacy regulations may be somewhat less effective than they appear in accomplishing their main goal of controlling the overall riskiness of the international banking system, but that they may be quite effective in decreasing the size of commercial banks'developing country loan portfolios. The paper also discusses how mandated provisioning rules against developing countries are an additional deterrent to increasing bank lending.Banks&Banking Reform,Financial Intermediation,Banking Law,International Terrorism&Counterterrorism,Economic Theory&Research

Developing country capital structures and emerging stock markets

In the developing world financing patterns vary greatly from what we observe in developed countries. In the poorest developing countries firms rely mostly on internal resources and informal credit markets for financing. This paper seeks to investigate the impact of emerging stock markets on the financing patterns of developing country corporations. The focus is to test whether equity markets and banking systems are complements or substituteds in providing financing to corporations. It is possible to answer this question by investigating capital structures of firms across a sample of countries with different levels of stock market development. If equity is substituted for debt financing one would expect countries with less developed stock markets to have higher leverage. However, if the opposite is true and there is complementarity between equity markets and banks, leverage would increase as stock markets become more developed. This paper discusses key properties of debt and equity contracts in financing decisions and reviews the literature on capital structure to identify relevant factors, other than stock market development, that may affect the financing pattern of corporations. It also presents preliminary empirical findings and identifies directions for further research.Economic Theory&Research,Banks&Banking Reform,Financial Intermediation,Environmental Economics&Policies,International Terrorism&Counterterrorism

Comparing early warning systems for banking crises

Despite the extensive literature on prediction of banking crises by Early Warning Systems (EWS), their practical use by policy makers is limited, even in the international financial institutions. This is a paradox since the changing nature of banking risks as more economies liberalise and develop their financial systems, as well as ongoing innovation, makes the use of EWS for crisis prevention more necessary than ever. In this context, we assess the logit and signal extraction EWS for banking crises on a comprehensive common dataset. We suggest that logit is the most appropriate approach for global EWS and signal extraction for country specific EWS. Furthermore it is important to consider the policy maker s objectives when designing predictive models and setting related thresholds since there is a sharp trade-off between correctly calling crises and false alarms

Stock market development and firm financing choices

The authors empirically analyze the association between firm financing choices and the level of development of financial markets in 30 countries for the period 1980-91. For the whole sample, there is a statistically significant negative correlation between stock market development, as measured by the ratio of market capitalization to gross domestic product, and the ratios of both long-term and short-term debt to firms'total equity. For developed markets in the sample, further stock market development leads to a substitution of equity for debt financing. In developing markets, by contrast, large firms become more leveraged as the stock market develops, whereas the smallest firms appear not to be significantly affected by market development.Banks&Banking Reform,Economic Theory&Research,Payment Systems&Infrastructure,Financial Intermediation,International Terrorism&Counterterrorism,Economic Theory&Research,Financial Intermediation,Banks&Banking Reform,Housing Finance,Environmental Economics&Policies

Basel core principles and bank soundness : does compliance matter ?

This paper studies whether compliance with the Basel Core Principles for effective banking supervision is associated with bank soundness. Using data for more than 3,000 banks in 86 countries, the authors find that neither the overall index of compliance with the Basel Core Principles nor the individual components of the index are robustly associated with bank risk measured by Z-scores. The results of the analysis cast doubt on the usefulness of the Basel Core Principles in ensuring bank soundness.Banks&Banking Reform,Public Sector Corruption&Anticorruption Measures,Financial Intermediation,Debt Markets,Hazard Risk Management

Institutions, financial markets, and firms'choice of debt maturity

This report examines the maturity of liabilities in firms in thirty developed and developing countries between 1980 and 1991. It finds systematic differences in the use of long-term debt between developed and developing countries, and between small and large firms. The authors attempt to explain the observed cross-country leverage and maturity variations by differences in their legal systems, financial institutions, government subsidy levels, firm characteristics, and in macroeconomic factors, such as the inflation rate and the economy's growth rate. The report provides evidence confirming that firms in developing countries have less long-term debt, even after accounting for their characteristics. This lack of term finance is mainly owing to institutional differences, such as the extent of government subsidies, the different level of development for stock markets and banks, and the differences in the underlying legal infrastructure. The report indicates that while policies that help develop legal and financial infrastructure are effective in increasing firm access to long-term debt, different policies would be necessary to lengthen the debt maturity of large and small firms. Improvements in legal efficacy seem to benefit all firms, although this result is much less significant for the smallest firms, which have limited access to the legal system. Similarly, policies that would help improve the functioning and liquidity of stock markets, would also mostly benefit large firms. In contrast, policies that would lead to improvements in the development of the banking system would improve the access of smaller firms to long-term credit.Banks&Banking Reform,Economic Theory&Research,Payment Systems&Infrastructure,Financial Intermediation,Environmental Economics&Policies,Economic Theory&Research,Banks&Banking Reform,Financial Intermediation,Environmental Economics&Policies,Housing Finance

Financial constraints, uses of funds, and firm growth : an international comparison

The authors focus on two issues. First they examine whether firms in different countries finance long-term and short term investment similarly. Second, they investigate whether differences in financial systems and legal institutions across countries are reflected in the ability of firms to grow faster than they might have by relying on their internal resources or short term borrowing. Across their sample they find: a) positive correlations between investment in plant and equipment and retained earnings; b) negative correlations between investment in plant and equipment and external financing; c) negative correlations between investment in short-term assets and retained earnings; and d) positive correlations between investments in short term assets and external financing. These findings suggest that financial markets and intermediaries have a comparative advantage in funding short-term investment. For each firm they estimate a predicted growth rate if it does not rely on long-term external financing. They show that the proportion of firms that grow faster than the predicted rate in each country is associated with specific features of the legal system, financial markets, and institutions. An active stock market and high scores on an index of respect for legal norms are associated with faster than predicted rates of firm growth. They present evidence that the law-and-order index measures the ability of creditors and debtors to enter into long-term contracts. Government subsidies to industry do not increase the proportion of firms growing faster than predicted.Economic Theory&Research,International Terrorism&Counterterrorism,Payment Systems&Infrastructure,Financial Intermediation,Environmental Economics&Policies,Economic Theory&Research,Financial Intermediation,International Terrorism&Counterterrorism,Environmental Economics&Policies,Banks&Banking Reform

Finance and economic opportunity

An influential body of theoretical research and an emerging line of empirical work suggest that the operation of the formal financial system affects the degree to which economic opportunities are defined bytalent and initiative rather than by parental wealth and social connections. This paper discusses the theory of how financial markets influence economic opportunity and reviews recent empirical work on the relation between formal financial systems and poverty, income inequality, and economic opportunity. The authors consider recent efforts to measure the ability of households and small enterprises to access financial services, the impact of this access, and the mechanisms through which finance affects poverty and inequality. The authors argue that considerably more research is needed to identify which formal financial sector policies enhance the operation of the financial system in ways that expand the economic horizons of the economically disenfranchised.Access to Finance,,Banks&Banking Reform,Emerging Markets,Debt Markets

Finance and inequality : theory and evidence

This paper critically reviews the literature on finance and inequality, highlighting substantive gaps in the literature. Finance plays a crucial role in most theories of persistent inequality. Unsurprisingly, therefore, economic theory provides a rich set of predictions concerning both the impact of finance on inequality and about the relevant mechanisms. Although subject to ample qualifications, the bulk of empirical research suggests that improvements in financial contracts, markets, and intermediaries expand economic opportunities and reduce inequality. Yet, there is a shortage of theoretical and empirical research on the potentially enormous impact of formal financial sector policies, such as bank regulations and securities law, on persistent inequality. Furthermore, there is no conceptual framework for considering the joint and endogenous evolution of finance, inequality, and economic growth.Access to Finance,Economic Theory&Research,,Debt Markets,Inequality