Have Differences in Credit Access Diminished in an Era of Financial Market Deregulation?

Over the past few decades, financial markets have become increasingly deregulated and household debt has expanded, sometimes rapidly. It is possible that greater deregulation led to improved credit access--measured by loan denials, discouraged applications, and costs of credit-- for typically underserved groups, such as minorities and low-income families, relative to their counterparts. Data from the Federal Reserve’s Survey of Consumer Finances however, shows no clear trend towards equalization of credit access from 1989 to 2004. While there were some gains by specific groups by certain measures (for example, the gaps in loan denials and discouraged applications improved for Hispanics, relative to Whites), the results indicate that differences in credit access did not decrease on a broad basis during a period of large scale financial deregulation.Household debt; credit access; costs of debt; interest rates; financial deregulation

Did Retirees Save Enough to Compensate for the Increase in Individual Risk Exposure?

The United States experienced an unprecedented financial crisis after 2007. This paper analyzes if retirees had enough wealth built up to weather the financial risks that materialized in the crisis. Financial risks associated with saving for retirement had increasingly shifted onto individuals away from the public and employers during the decades before the crisis. This growing personal responsibility should have gone along with more saving and less risk taking.�This Working Paper uses data from the Federal Reserve’s triennial Survey of Consumer Finances to first define an income threshold for retirees, specifically whether annuity income is greater than twice the poverty line – a common proxy for basic income needs. Weller then calculates the potential retirement income that retirees could expect if they translated all of their wealth into income and if the income is adjusted for market, idiosyncratic, and longevity risks. He compares the potential risk-adjusted income for retirees with annuity income above twice the poverty line to those retirees with annuity income below twice the poverty line. Both groups of retirees should have at least the same level of risk-adjusted potential retirement income. This comparison shows, however, that retirees with annuity income below twice the poverty line did not build up sufficient wealth to compensate for the rising financial risk exposure. Public policy thus should maintain existing sources of annuity income, promote greater annuitization of financial wealth, and encourage additional savings. �Retirement income adequacy; personal saving; financial risks

Financial crises after financial liberalization: Exceptional circumstances or structural weakness?

Recent studies have conjectured that there may be a link between financial liberalization and financial instability in emerging economies. Most of these studies, however, do not investigate whether emerging economies are becoming structurally more vulnerable to currency and banking crises. In this paper, we argue that emerging economies are systematically becoming more susceptible to both currency and banking crises after FL. Using data for 27 emerging economies from 1973 to the present, univariate and multivariate analyses indicate that the likelihood of currency crises and banking crises increase after FL. In particular, liberalization allows more liquidity to enter an emerging economy, which finds its way into productive and speculative projects. What is common to both types of crises is a significant increase in speculative financing, thereby increasing the chance for borrower default. Thus, the outflow of international capital becomes more likely, and we find that the chance of either type of crisis grows faster in response to changes in short-term loans after FL than before. Similarly, the reactions to overvalued currencies are at least similar in terms of increasing probabilities of crises in the case of banking crises, or greater in the case of currency crises after FL as compared to before FL. Further, our results show that after FL the chance of a currency crisis declines over time, while the chance of a banking crisis increases. --Emerging economies,Financial liberalization,financial instability,currency crises,banking crises

The connection between more multinational banks and less real credit in transition economies

The number of multinational banks have increased in transition economies in Central and Eastern Europe, while the amount of real credit has simultaneously decreased. Based on the cases of Poland and Hungary during the first six years of economic transition this paper investigates if there is a link between greater international financial competition and less real credit. I provide a theoretical argument that connects the number of multinational banks to the availability of capital for domestic banks, and hence to their lending capacity. In support of this argument, I employ data from both countries' central banks, central statistical offices, and private institutions, as well as from international institutions, such as IMF and BIS. The evidence suggests that the increases in efficiency which result from greater competition do not outweigh the limitations on the capital base of domestic banks. Consequently, I find that the constraints that international financial competition places on domestic banks to raise their capital leads them to reduce their commercial lending activities in the early stages of financial liberalization. --

Could International Labor Rights Play a Role in U.S. Trade?

During its last complete business cycle, from 2001 to 2007, the United States experienced unsustainably high trade deficits. Policymakers are considering a number of measures to avoid a recurrence of such large external imbalances. One such measure is the promotion of better labor rights around the world. Proponents argue that higher labor standards would boost U.S. exports by increasing income growth abroad and reduce U.S. imports by shrinking international price differences. Opponents of such a policy move argue that it is disguised protectionism that will impede trade and harm living standards in the United States and abroad. In this paper, Weller combines U.S. trade data with data on international labor standards and other relevant economic variables to study if there is a link between labor rights abroad and U.S. trade. The results suggest that the United States would have benefited from more exports if there had been better worker rights around the world, while labor rights would not have had any measurable impact on U.S. imports. That is, the promotion of better worker rights around the world could contribute to fewer external imbalances without impeding international trade flows.U.S. trade deficit; labor rights; relative price differences

The Recent Stock Market Fluctuations and Retirement Income Adequacy

This paper analyzes the effect of wealth fluctuations on retirement income adequacy between 1992 and 2001. In addition, the paper estimates how financial wealth relative to income may develop in the medium to long-term. The average household was adequately prepared for retirement, even after the decline in the stock market, if it is assumed that retirement income needs fall in real terms with age. But if a fixed real level of consumption is considered for retirement income adequacy, the average household was more likely inadequately prepared for retirement, even after wealth increased dramatically in the late 1990s. Moreover, on average households can only expect to reach their peak wealth to income levels again within the next 10 to 20 years if increases in personal savings rates or rates of return are assumed. Without such changes, it is also unlikely that households will be able, on average, to reach an adequate level of retirement savings, assuming that their income needs in retirement do not decline in real terms.

Programs without alternative: Public pensions in the OECD

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Prudent Investors: The Asset Allocation of Public Pension Plans

After 2000, the vast majority of defined benefit (DB) pension plans encountered a decrease in their funding ratios, largely due to a drop in asset prices. It is possible that public sector pension plans may have acted imprudently by chasing returns, once they encountered underfunding. We identify four indicators for DB plans’ imprudent investment behavior: no portfolio rebalancing, employer conflicts of interest, trustee conflicts of interest, and failure to implement best investment practices. To see if public sector pension plans rebalance their portfolios, we use data from the Federal Reserve’s Flow of Funds, dating from 1952 to 2007. To test for the remaining three hypotheses, we use data from the Census’ State and Local Government Employee Retirement Systems data base, where consistent data for state and local government plans are available from 1993 to 2005. Our results suggest that there is no evidence that public sector plans systematically engaged in imprudent investment behavior and that this did not systematically differ after 2000 from the earlier period.

Financial Stress and Asymmetric Financial Decisions

Building wealth requires saving, borrowing, and investing. These decisions may depend on stress due to the lack of financial security (low financial assets). Stress should influence personal responses – emotional, behavioral, and cognitive – that in turn could determine financial decisions. The link between stress and financial decisions could be asymmetric, so that fewer financial assets result in larger absolute financial decisions than more assets. We first divide households between stressed (financially insecure) and not stressed (financially secure) ones, using a threshold regression. Comparatively little assets divide stressed and not stressed households. We then show that low levels of financial assets have a larger adverse effect on personal responses among stressed households than among not stressed ones. Personal responses, though, systematically determine financial decisions, such that more stress and lower personal responses lead to a more short-term focus in financial decisions. These linkages between stress, personal responses, and financial decisions indeed give rise to an asymmetric effect. The absolute effect of a stock price decrease of 30%, for instance, is 28% larger than the effect of a 30% stock price increase. Exogenous asset shocks could result in a reduced focus on long-term wealth building among households, because of the asymmetric effect of financial stress.Financial stress, financial security, financial decisions, savings, borrowing, investing

The Interplay between Labor and Financial Markets: What are the Implications for Defined Contribution Accounts?

The relationship between earnings, savings and retirement is well-known; however the linkage between labor market outcomes and financial market performance is generally unacknowledged. This Working Paper examines the implications of the link between labor markets and financial markets for workers who save money in individual retirement accounts. Specifically, differences in labor market outcomes across groups may imply differences in the timing of investments, which may reduce savings over time for these groups compared to their counterparts. Using monthly data from the Current Population Survey (1979-2002) we generate hypothetical investment portfolios using stock and bond indices. We exploit differences across demographic groups in unemployment and wage growth, and use these differences to examine each group’s investment outcomes. We then disaggregate the total effects into short-term and long-term components. We find some evidence of short-term market timing effects on investment, but we find much larger long-term effects for some groups. Our findings suggest that, for many people, the retirement savings losses associated with the timing of markets are similar to the costs of annuitizing savings upon retirement. The differences are especially pronounced by education and sex.Individual accounts, retirement savings, earnings volatility