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

Market discipline and financial safety net design

There has been little empirical work on the effectiveness of safety nets designed for banks, for lack of data on safety net design across countries. The authors examine cross-country data on bank-level interest expense and deposit growth for evidence of market discipline in individual countries. In addition, using cross-country information on deposit insurance systems, they investigate the impact of explicit deposit insurance (and its key features) on bank interest rates and market discipline. They find that: 1) Many countries retain some degree of market discipline, regardless of the type of safety net. 2) The existence of explicit deposit insurance lowers banks'interest expenses and makes interest payments less sensitive to bank risk factors, especially bank liquidity. 3) Higher explicit coverage, broader coverage, and the existence of an earmarked insurance fund increase required-deposit rates and reduce market discipline. 4) Private (especially joint) management of insurance schemes lowers deposit rates and improves market discipline.Financial Intermediation,Banks&Banking Reform,Insurance&Risk Mitigation,Payment Systems&Infrastructure,Insurance Law,Banks&Banking Reform,Financial Intermediation,Insurance&Risk Mitigation,Insurance Law,Financial Crisis Management&Restructuring