Financial Crisis and Sectoral Diversification of Argentine Banks, 1999-2004.

We explore the impact and evolution of loan portfolio diversification during the 2001-2002 Argentine financial crisis. Using a novel dataset that combines public information on the main activity of the largest 930 Argentine firms with their borrowing from each bank operating in the country during the 1999-2004 period, we find that banks did not modify much their loan portfolio mix as a response to the crisis, even though the econometric results point to a positive effect of sectoral diversification and lending to tradeable sectors on bank profitability and risk mitigation. Our results suggest that larger banks benefit more from diversification that smaller ones, and that the benefits of diversification are greater during the downside of the business cycle.Focus, Diversification, Bank risk, Bank return.

Creditor Rights and the Credit Market: Where Do We Stand?

A recent survey has shown that the major problem faced by firms in Latin American countries is difficulty in accessing financial markets. Figure 1 summarizes the findings of the Business Environment Survey on obstacles faced by firms.

Where to sell the next cappuccino? Income per capita and coffee consumption

This paper estimates the world demand for coffee using a dataset for 88 countries from 1990 to 2005, and dynamic panel data estimators. Results suggest that the income elasticity of demand is non constant and varies according to a country's income level. Higher income countries have lower income elasticities than middle and low income ones. Differences in price elasticities are not significant across income groups.Coffee, Demand, Income, Price, Elasticity

BANK CREDIT TO SMALL AND MEDIUM SIZED ENTERPRISES: THE ROLE OF CREDITOR PROTECTION

We develop a model that shows that inefficient legal protections, disproportionately increase financial restrictions for debtors that have less wealth. Due to fixed monitoring costs in equilibrium banks will not monitor small firms and therefore these firms will adopt risky technologies that imply a higher probability of bankruptcy. This implies that inefficiencies in the bankruptcy procedure will have a greater effect on small firms vis a vis large ones. Using a survey of firms in 62 countries around the world (WBES) and econometric techniques that allow us to deal with observed and unobserved country specific components as well as with partial endogeneity, we explore the role of creditor protection on small and medium-size enterprises' access to bank credit. We find that better protection of creditors reduces the financing gap between small and large firmsLaw and Finance, Credit, Small and Medium Size Enterprises

Credit Constraints in Latin America: An Overview of the Micro Evidence

This paper summarizes and discusses new evidence on the nature, extent, evolution and consequences of financing constraints in Latin America; this evidence is drawn from a recent series of papers. The countries covered are Argentina, Colombia, Costa Rica, Ecuador, Mexico, and Uruguay. All the new contributions share the characteristics of being based on micro data. Most of the data sources are firms’ balance sheets. For Argentina information on debt contracts and credit history is also available, while for Costa Rica personal information on entrepreneurs was also collected. Some of the papers investigate the determinants of firms’ financing choices, and the consequences of access or debt composition on performance. Other papers attempt to assess the severity of financing constraints, by focusing on firms’ investment choices. All the papers (but one) were part of the project “Determinants and Consequences of Financial Constraints Facing Firms in Latin America and the Caribbean,” financed by the IADB. However, other recent micro-econometric contributions are discussed as well. The results suggest that access to credit (and its cost) depends not only upon favorable balance sheet characteristics, but also upon the closeness of the relationship between firms and banks as well as credit history. Access to long-term loans and to loans denominated in foreign currency is positively related to the size and tangibility of firms’ assets and negatively related to measures of country risk. Moreover, firms that have foreign participation appear to be less financially constrained in their investment decisions. The same is true for firms that are associated with business groups. On the whole, it appears that financial liberalization tends to relax financial constraints for firms that were previously constrained, while financial crises tighten them. However, firms that have more access to external sources of finance via, for instance, exports or ownership links, appear to suffer less in the post-crisis period. The paper concludes with a discussion of the policy implications of these results.

Las paradas repentinas y las estrategias cambiarias en América Latina

(Disponible en idioma inglés únicamente) Un análisis de varios estudios de casos específicos en la región sugiere que la capacidad de sostener una política monetaria creíble depende del grado de vulnerabilidad de los países a las repercusiones de las paradas repentinas. A este respecto, hay cuatro aspectos de vital importancia que atenúan esas repercusiones. La apertura de la economía de modo que se produzca un aumento de la oferta de bienes transables reduce la disminución de la absorción de dichos bienes que normalmente acarrea una parada repentina. Reducir el nivel de endeudamiento asegura que la depreciación del tipo de cambio real sea menor. Disminuir los descalces cambiarios en la composición de la deuda en relación con la composición de la producción reduce la vulnerabilidad a los efectos de la valuación. Por último, también es preciso acometer la exposición a posibles contingencias fiscales, a fin de disminuir la vulnerabilidad de las cuentas fiscales, tales como los costosos rescates de bancos producto de los descalces cambiarios en el sector financiero.

FINANCIAL CRISIS AND SECTORAL DIVERSIFICATION OF ARGENTINE BANKS, 1999-2004

We explore the impact and evolution of loan portfolio diversification during the 2001-2002 Argentine financial crisis. Using a novel dataset that combines public information on the main activity of the largest 930 Argentine firms with their borrowing from each bank operating in the country during the 1999-2004 period, we find that banks did not modify much their loan portfolio mix as a response to the crisis, even though the econometric results point to a positive effect of sectoral diversification and lending to tradeable sectors on bank profitability and risk mitigation. Our results suggest that larger banks benefit more from diversification that smaller ones, and that the benefits of diversification are greater during the downside of the business cycle.Focus, Diversification, Bank risk, Bank return

¿Fomentan el desarrollo los bancos propiedad del Estado? Elementos de juicio de las industrias manufactureras de una muestra de países

(Disponible en idioma inglés únicamente) En este trabajo se pone a prueba la eficiencia de diversas estructuras de propiedad de instituciones bancarias, en términos de su capacidad de atender sectores manufactureros específicos que necesitan crédito. Hallamos que los bancos propiedad del Estado no desempeñan un papel significativo en el desarrollo de industrias que dependan más del financiamiento externo o que tengan menos activos tangibles que constituir en garantía, o ambas cosas.

Creditor protection and financial markets: empirical evidence and implications for Latin America

Although Latin American countries have made significant strides in reforming their financial markets, these markets remain shallow, implying a need for further reform. Stronger protection of creditor rights can improve the size and stability of credit markets and provide greater access to capital for small and medium-sized enterprises that operate under greater financial strictures. ; In discussing creditor protection’s impact on the size of financial markets, the authors first document the state of Latin American creditor protection. They then discuss the effect of enhanced creditor rights on small and medium-sized firms and how the dynamics of financial markets are affected by the regulation of creditor rights. To examine the effects of adverse economic shocks on creditors, the authors study the credit cycle in various countries. ; In addition to increasing the size of financial markets and stimulating economic growth, reforms that strengthen creditor protection can affect credit allocation, the authors find. Their research suggests that the rules and regulations concerning the seizure of collateral need reforming and, more importantly, that the judicial system must become more agile to assure prompt, effective, and less expensive enforcement of creditor rights. The authors note that the successful introduction of these reforms may require convincing the citizenry that creditor protections benefit not only the financial sector but the economy overall.Economic stabilization

Corporate Leverage, the Cost of Capital,and the Financial Crisis in Latin America

Using a quarterly dataset of 185 listed firms in six Latin American countries between 1993 and 2009 we find that leverage is positively related to tangibility, firm size and the market to book ratio, and negatively related to profitability. The average cost of debt is negatively related with size, tangibility, firm growth, the leverage ratio, and the ratio of long- to short-term debt and positively to profitability. We find that the recent international crisis did not have a significant impact on the set of firms in our sample, but affected the way in which leverage and the interest to debt ratio relate to firm fundamentals. In particular we find that the links between leverage, tangibility and profitability were strengthened, and that financial constraints were not increased during the crisis.The evidence is consistent with a flight-to-quality phenomenon in favor of big, listed firms.Corporate leverage, cost of debt, financial crisis, Latin America.