The Impact of Banking Crises on Money Demand and Price Stability

This paper empirically investigates the monetary impact of banking crises in Chile, Colombia, Denmark, Japan, Kenya, Malaysia, and Uruguay during 1975-98. Cointegration analysis and error correction modeling are used to research two issues: (i) whether money demand stability is threatened by banking crises; and (ii) whether crises lead to structural breaks in the relation between monetary indicators and prices. Overall, no systematic evidence that banking crises cause money demand instability is found. However, the results on price stability are mixed; for three out of the seven countries, there appears to be evidence of instability. . Copyright 2002, International Monetary Fund

Factors that affect short-term commercial bank lending to developing countries

Developing countries rely on short-term trade credits for imports of several essential consumer goods, including medicines and basic food supplies. The credits also facilitate export-related transactions. The mechanisms commercial banks use to provide trade credits to developing countries are complex and costly. Even a temporary break in the flow of short-term credit can seriously hurt a country's business. But since short-term trade credits can be structured so that they involve a few risks to a bank and at the same time are very costly to the debtor, they are generally the last forms of credit to be cut and the first to be reestablished in debt-distressed developing countries. To gauge the likelihood of continued short-term trade related financial flows to developing countries, the authors examined the factors that affect short-term commercial bank loans. They studied relevant data over time for seven countries for which data were available: Argentina, Brazil, Egypt,India, Kenya, Mexico, and Turkey. They found that : a) countries with greater growth prospects get more short-term credit; b) short-term credits are usually meant to finance countries with significant trade deficits; c) higher levels of external indebtedness are generally coupled with higher levels of short-term indebtedness to commercial banks; and d) country-specific factors affect the volume of short-term lending to a country.Financial Intermediation,Banks&Banking Reform,Economic Theory&Research,Strategic Debt Management,Financial Crisis Management&Restructuring

How foreign participation and market concentration impact bank spreads : evidence from Latin America

Increasing foreign participation and high concentration levels characterize the recent evolution of banking sectors'market structures in developing countries. The authors analyze the impact of these factors on Latin American bank spreads during the late 1990s. Their results suggest that foreign banks were able to charge lower spreads relative to domestic banks. This was more so for de novo foreign banks than for those that entered through acquisitions. The overall level of foreign bank participation seemed to influence spreads indirectly, primarily through its effect on administrative costs. Bank concentration was positively and directly related to both higher spreads and costs.Payment Systems&Infrastructure,Banks&Banking Reform,Decentralization,Financial Intermediation,Banking Law,Financial Intermediation,Banking Law,Municipal Financial Management,Financial Crisis Management&Restructuring,Banks&Banking Reform

Foreign bank acquisitions and outreach : evidence from Mexico

Recently, developing countries have witnessed a sharp increase in foreign bank participation. The authors examine the impact on banking outreach using newly gathered data for Mexico, where foreign bank participation rose from 2 percent to 83 percent of assets during 1997-2005. Country-, bank-, and bank-municipality level estimations show a decline in the number of deposit and loan accounts. While country- and bank-level estimations indicate an increase in the share of municipalities with bank branches and in the likelihood of bank presence, bank-municipality regressions show that only rich and urban municipalities benefited. Overall, the evidence is consistent with a decline in outreach.Banks&Banking Reform,Access to Finance,,Debt Markets,Corporate Law

What explains the cost of remittances ? an examination across 119 country corridors

Remittances are a sizeable source of external financing for developing countries. In the L’Aquila 2009 G8 Summit, leaders pledged to reduce the cost of remittances by half in 5 years (from 10 to 5 percent). Yet, empirically, little is known about what drives the cost of remittances. Using newly gathered data across 119 country corridors, this paper explores the factors that determine the cost of remittances. Considering average costs across all types of institutions, the authors find that corridors with larger numbers of migrants and more competition among remittances service providers exhibit lower costs. By contrast, remittance costs are higher in richer corridors and in corridors with greater bank participation in the remittances market. Comparing results across all banks and all money transfer operators separately, the analysis finds few significant differences. However, estimations for Western Union, a leading player in the remittances business, suggest that this firm’s prices are insensitive to competition.Population Policies,Remittances,Access to Finance,Debt Markets,Economic Theory&Research

Foreign bank participation and crises in developing countries

This paper describes the recent trends in foreign bank ownership in developing countries, summarizes the existing evidence on the causes and implications of foreign bank presence, and reexamines the link between banking crises and foreign bank participation. Using data on the share of banking sector assets held by foreign banks in over 100 developing countries during 1995-2002, the results show that countries that experienced a banking crisis tended to have higher levels of foreign bank participation than those that did not. Furthermore, panel regressions indicate that foreign participation increased as a result of crises rather than prior to them. However, post-crisis increases in foreign participation did not coincide with increased credit to the private sector, perhaps because in many cases foreign banks acquired distressed banks.Banks&Banking Reform,Foreign Direct Investment,Corporate Law,Privatization,Financial Crisis Management&Restructuring

A regime - switching approach to studying speculative attacks : focus on European Monetary System crises

The author uses a regime switching framework to study speculative attacks against European Monetary System (EMS) currencies during 1979-93. She identifies speculative attacks by modeling exchange rates, reserves, and interest rates as time series subject to discrete regime shifts. She assumes two states:"tranquil"and"speculative."She models the probabilities of switching between states as a function of fundamentals and expectations. She concludes that: A) The switching models with time -varying transition probabilities capture most of the conventional episodes of speculative attacks. B) Speculative attacks do not always coincide with currency realignments. C) Both economic fundamentals and expectations determine the likelihood of switching from a period of tranquility to a speculative attack. The budget deficit appears to be an especially important factor driving the probability of switching to a speculative regime. Given the importance of anticipating and, wherever possible, avoiding crises, it might be useful to conduct forecasting exercises to determine whether the switching framework proposed here can be used to forecast crises in countries outside the sample. Because currency crises tend to occur simultaneously in two or more countries, it also might be useful to adapt the regime - switching framework to explore the role of contagion in explaining crises.Payment Systems&Infrastructure,Statistical&Mathematical Sciences,Environmental Economics&Policies,Economic Theory&Research,Fiscal&Monetary Policy,Economic Theory&Research,Economic Stabilization,Environmental Economics&Policies,Macroeconomic Management,Fiscal&Monetary Policy

The impact of banking crises on money demand and price stability

The author empirically investigates the monetary impact of banking crises in Colombia, Chile, Denmark, Japan, Kenya, Malaysia, and Uruguay. She uses co-integration analysis and error correction modeling to research: 1) Whether money demand stability is threatened by banking crises. 2) Whether crises bring about structural breaks in the relationship between monetary indicators and prices. Overall, she finds no systematic evidence that banking crises cause money demand instability. Nor do the results consistently support the notion that the relationship between monetary indicators and prices undergoes structural breaks during crises. However, although individual coefficients in price equations do not seem to be severely affected by crises, crises can sometimes give rise to variance instability in price or inflation equations.Economic Theory&Research,Financial Intermediation,Payment Systems&Infrastructure,Environmental Economics&Policies,Fiscal&Monetary Policy,Financial Intermediation,Settlement of Investment Disputes,Economic Theory&Research,Fiscal&Monetary Policy,Environmental Economics&Policies

The mix of international banks'foreign claims : determinants and implications

The authors analyze the determinants and implications for financial stability of the mix of international banks'claims countries receive. In particular, they distinguish between local claims, extended by international banks through their affiliates in a host (or claim recipient) country, and cross-border claims, booked from outside the host country, typically from banks'headquarters in their home countries. Using data on U.S., Spanish, and Italian banks'foreign claims across countries, the authors find that the share of local foreign claims is primarily driven by the degree of"freedom"in the host banking sector and by business opportunities in the local market. Entry requirements, startup and informational costs associated with international banking also play a role, but their influence is less robust. Finally, they find that the mix of international bank claims has implications for financial stability, since foreign claim volatility is lower in countries that receive a larger share of local claims.Banks&Banking Reform,Financial Intermediation,Insurance&Risk Mitigation,Financial Crisis Management&Restructuring,Banking Law

Do depositors punish banks for"bad"behavior? : market discipline in Argentina, Chile, and Mexico

The authors examine the banking industries of Argentina, Chile, and Mexico to see if market discipline existed there in the 1980s and 1990s. Using a set of bank panel data, they test for the presence of market discipline by studying whether depositors punish risky banks by withdrawing their deposits. They find that across countries and across deposit insurance schemes, market discipline exists even among small insured depositors - who punish risky banks by withdrawing their deposits. Standardized coefficients and variance decomposition of deposits indicate that bank fundamentals are at least as important as other factors affecting deposits. Generalized Method of Moments estimates confirm that the results are robust to the potential endogeneity of bank fundamentals.Financial Intermediation,Payment Systems&Infrastructure,Financial Crisis Management&Restructuring,Rural Finance,Banks&Banking Reform,Banks&Banking Reform,Financial Intermediation,Financial Crisis Management&Restructuring,Financial Economics,Insurance&Risk Mitigation