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

Are banks too big to fail or too big to save ? International evidence from equity prices and CDS spreads

Deteriorating public finances around the world raise doubts about countries'abilities to bail out their largest banks. For an international sample of banks, this paper investigates the impact of government indebtedness and deficits on bank stock prices and credit default swap spreads. Overall, bank stock prices reflect a negative capitalization of government debt and they respond negatively to deficits. The authors present evidence that in 2008 systemically large banks saw a reduction in their market valuation in countries running large fiscal deficits. Furthermore, the change in bank credit default swap spreads in 2008 relative to 2007 reflects countries'deterioration of public deficits. The results of the analysis suggest that some systemically important banks can increase their value by downsizing or splitting up, as they have become too big to save, potentially reversing the trend to ever larger banks. The paper also documents that a smaller proportion of banks are systemically important -- relative to gross domestic product -- in 2008 than in the two previous years, which could reflect private incentives to downsize.Banks&Banking Reform,Debt Markets,Access to Finance,Bankruptcy and Resolution of Financial Distress,Economic Theory&Research

Interest rates, official lending, and the debt crisis : a reassessment

The authors document and try to explain the sizable cross-country differences in interest rates on external debt paid by a group of highly indebted developing countries in 1973-89. They find that Indonesia and Turkey, which are often praised for not rescheduling in the 1980s, paid interest rates substantially below LIBOR - and avoided the interest rate shock of the early 1980s. Differences in the default-risk premium explain some of the variation among countries, but different degrees of access to official loans carrying highly subsidized interest rates played the major role. In the sample they studied, they found no evidence that debt at floating interest rates was more expensive than debt at fixed rates. For the period 1981-89, it is possible to control for differences in the currency composition of debt, and the results are essentially unchanged. These results suggest that studies of economic performance among the highly indebted countries during the debt crisis should control for cross-country differences in the burden of interest payments.Economic Theory&Research,Strategic Debt Management,Environmental Economics&Policies,Banks&Banking Reform,Financial Intermediation

Official credits to developing countries : implicit transfers to the banks

This paper investigates the impact on the wealth of bank share holders on the transfer of official resources to the debtor countries. The main aim was to derive actual estimates of increases in shareholder wealth following important news concerning future transfers from the multilaterals to the debtor nations. The main result, is that stock market expects virtually all additional resources provided to debtor countries to be used for debt service to commercial banks. While the estimated magnitude of these effects are informative, the emphasis should be on the direction of these effects as they are robust to overestimation problems. Clearly, official resources provided to debtor countries do devolve to creditor banks. However, the debtor countries should at least gain in so far as the reduction of a debt overhang eliminates investment distortions. The results stem from the fact that some of the monies provided by the multilaterals are specifically earmarked for debt service or are in the form of general balance-of-payments support that the developing countries can use for private debt service. Official creditor resources that are specially provided to finance development projects are less likely to be allocated to bank debt service.Financial Crisis Management&Restructuring,Municipal Financial Management,Economic Theory&Research,Banks&Banking Reform,Financial Intermediation

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

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

Finance, financial sector policies, and long-run growth

The first part of this paper reviews the literature on the relation between finance and growth. The second part of the paper reviews the literature on the historical and policy determinants of financial development. Governments play a central role in shaping the operation of financial systems and the degree to which large segments of the financial system have access to financial services. The paper discusses the relationship between financial sector policies and economic development.Debt Markets,Access to Finance,Emerging Markets,,Economic Theory&Research

The determinants of banking crises : evidence from industrial and developing countries

In the 1980s and 1990s several countries experienced banking crises. The authors try to identify features of the economic environment that tend to breed problems in the banking sector. They do so by economically estimating the probability of a systemic crisis, applying a multivariate logic model to data from a large panel of countries, both industrial and developing, for the period 1980-94. Included in the panel as controls are countries that never experienced banking problems. The authors find that crises tend to occur in a weak macroeconomic environment characterized by slow GDP growth and high inflation. When these effects are controlled for, neither the rate of currency depreciation nor the fiscal deficit are significant. Also associated with a high probability of crisis are vulnerability to sudden capital outflows, low liquidity in the banking sector, a high share of credit to the private sector, and past credit growth. Another factor significantly (and robustly) associated with increased vulnerability in the banking sector is the presence of explicit deposit insurance, suggesting that moral hazard has played a major role. Finally, countries with weak institutions (as measured by a"law and order"index) are more likely to experience crises.Labor Policies,Payment Systems&Infrastructure,Financial Intermediation,Banks&Banking Reform,Financial Crisis Management&Restructuring,Financial Economics,Banks&Banking Reform,Financial Crisis Management&Restructuring,Financial Intermediation,Insurance&Risk Mitigation

Determinants of commercial bank interest margins and profitability : some international evidence

Using bank data for 80 countries for 1988-95, the authors show that differences in interest margins and bank profitability reflect various determinants: bank characteristics, macroeconomic conditions, explicit and implicit bank taxes, regulation of deposit insurance, general financial structure, and several underlying legal and institutional indicators. Controlling for differences in bank activity, leverage, and the macroeconomic environment, they find (among other things) that: 1) Banks in countries with a more competitive banking sector--where banking assets constitute a larger share of GDP--have smaller margins and are less profitable. The bank concentration ratio also affects bank profitability; larger banks tend to have higher margins. 2) Well-capitalized banks have higher net interest margins and are more profitable. This is consistent with the fact that banks with higher capital ratios have a lower cost of funding because of lower prospective bankruptcy costs. 3) Differences in a bank's activity mix affect spread and profitability. Banks with relatively high non-interest-earning assets are less profitable. Also, banks that rely largely on deposits for their funding are less profitable, as deposits require more branching and other expenses. Similarly, variations in overhead and other operating costs are reflected in variations in bank interest margins, as banks pass their operating costs (including the corporate tax burden) onto their depositors and lenders. 4) In developing countries, foreign banks have greater margins and profits than domestic banks. In industrial countries, the opposite is true. 5) Macroeconomic factors also explain variation in interest margins. Inflation is associated with higher realized interest margins and greater profitability. Inflation brings higher costs--more transactions and generally more extensive branch networks--and also more income from bank float. Bank income increases more with inflation than bank costs do. 6) There is evidence that the corporate tax burden is fully passed on to bank customers in poor and rich countries alike. 7) Legal and institutional differences matter. Indicators of better contract enforcement, efficiency in the legal system, and lack of corruption are associated with lower realized interest margins and lower profitability.Environmental Economics&Policies,Banks&Banking Reform,International Terrorism&Counterterrorism,Payment Systems&Infrastructure,Economic Theory&Research,Banks&Banking Reform,Economic Theory&Research,Environmental Economics&Policies,Financial Intermediation,Financial Crisis Management&Restructuring