The U.S. Federal Deposit Insurance Corp. released a study yesterday reporting that 17 million adults – or 7% of the adult population - live in an unbanked household. In fact, because they use the household as the unit of measurement, the FDIC considers this to be a lower-bound estimate of the number of unbanked adults living in America. The finding is therefore consistent with the World Bank Development Research Group’s Global Findex database which finds that 12% of American adults are unbanked. Both data sources consider an adult to be unbanked if they do not have an account at a formal financial institution.
The failure of the investment banking giant Lehman Brothers on September 15, 2008 marked the onset of the largest global economic meltdown since the Great Depression. The crisis has prompted many people to reassess state interventions in financial systems, from regulation and supervision of financial institutions and markets, to competition policy, to state guarantees and state ownership of banks, and to enhancements in financial infrastructure. But the crisis does not necessarily negate the considerable body of evidence on these topics accumulated over the past few decades. It is important to use the crisis experience to examine what went wrong and how to fix it. This is the motivation of the World Bank’s Global Financial Development Report, released this week, on the fourth anniversary of the Lehman failure.
There is more than one side to every story. Bank lending to small and medium enterprises (SMEs) is not an exception. On one side are SMEs, their expansion plans, and their needs for financing. On the other side are banks and their policies. Empirical analyses of financing to SMEs typically focus on the firms’ side of the story. Surveys gather information from firms and try to understand their sources of financing, if they are credit-constrained, or even if they rule themselves out from applying for bank loans because they believe they will be turned down by banks. Those surveys also collect detailed information on firm characteristics, e.g. the date the firm started operations, the owner’s gender, and the reason why the business was started. In other words, surveys on SME financing focus on consumers with great detail. Surveys rarely—if ever—focus on suppliers.
Financial literacy programs are fast becoming a key ingredient in financial policy reform worldwide. Yet, what is financial literacy exactly and what do we know of its effectiveness? In a new paper, Lisa Xu and I summarize existing evidence on both measurement and impact of financial literacy and provide lessons for policymakers and guidance for researchers on future work in this area.
While the working paper provides a detailed and practitioner-oriented overview of the recent research, drawing on what we’ve learned from surveys, impact evaluations, and other empirical work, I want to use this blog space to focus on lessons for the way forward.
Approximately 50 percent of the global adult population - or 2.5 billion people - are excluded from the formal financial system. Who are the unbanked? The vast majority of these adults are concentrated in the developing world - only a third of South Asians, a quarter of Sub-Saharan Africans, and less than a fifth of Middle-Easterners and North Africans have an account at a formal financial institution (Demirguc-Kunt & Klapper, 2012). Why are these people unbanked? A shortage of money, excessive cost, distance to a bank, and documentation requirements are reported by the unbanked themselves as the main barriers to financial access.
In the aftermath of the global financial crisis, there has been much criticism of compensation practices at banks. Although much of this debate has focused on executive compensation (see the recent debate on this blog), there is a growing recognition that non-equity incentives for loan officers and other employees at the lower tiers of a bank’s corporate hierarchy may share some of the blame — volume incentives for mortgage brokers in the United States that rewarded high-risk lending at wildly unsustainable terms are a particularly striking case in point.
The impact of bank competition on financial markets and firms is an important topic of concern for policymakers and researchers alike. Interest in this topic intensified during the recent global financial crisis as researchers and policymakers questioned whether high competition was partly to blame.1 Those against bank competition make two main arguments. First, competition may lead to risky lending practices as financial institutions search for higher margins. The increase in subprime lending is an example of such behavior prior to the recent crisis. Second, higher competition may erode banks’ profit margins and leave them with insufficient capital cushions, something that also played a role in the recent crisis. On the other hand, those in favor of competition argue that it can improve access to finance, especially for small and medium enterprises, and that any negative effects on stability are better addressed by proper regulation and supervision of financial institutions.
The past two decades have seen a large increase in foreign bank entry across the globe, a trend that has been especially strong in the transition countries of Central and Eastern Europe and in Latin America. The effects of foreign bank participation on lending to small and medium enterprises (SMEs) have been a controversial issue among academics and policy makers alike. Critical issues in this debate have been different clienteles and lending techniques of domestic and foreign banks. Most prominently, Mian (2006) shows that clients of foreign banks in Pakistan are of larger size, more transparent, in larger cities and more likely to be foreign-owned, inferring from that the lending techniques foreign banks apply. This analysis, however, confounds two effects – differences in clientele and differences in lending techniques. Do foreign banks use different lending techniques because they have different clienteles or do they use different lending techniques even for the same customers of domestic banks? In recent work with my Tilburg colleagues Vasso Ioannidou and Larissa Schäfer, we use data from the Bolivian credit registry and focus on a sample of firms that borrow from domestic and foreign banks in the same month to isolate the effects of different lending techniques of banks of different ownership (Beck, Ioannidou and Schäfer, 2012).
In a recent paper, George Clarke, Gregory Kisunko and I use data from firms in Eastern Europe, a region that was especially hard hit by the global financial crisis, to study which firms survived and how they did it. Our first data source is a panel of firms from 23 countries that were interviewed in 2002, 2005, and 2008-9 as part of the Business Environment and Enterprise Performance Surveys (BEEPS). It allows us to document how financial constraints evolved over time and to see how firm and country characteristics affected those constraints during the crisis. The second dataset, from the Financial Crisis Surveys (FCS) that were conducted as follow-ups to the BEEPS in six countries (Bulgaria, Hungary, Latvia, Lithuania, Romania and Turkey) in 2009, allows us to look at how changes in access to financing affected firm survival rates during the crisis.
Most observers have realized by now that a core problem of the Eurocrisis is the close interconnection between banking and sovereign fragility. The ongoing sovereign debt crisis in Europe continues to put strains on banks’ balance sheets — full of government bonds — while continuous bank fragility increases (contingent and more and more real) government liabilities. Rather than disentangling the sovereign debt and bank crises, recent policy decisions have tied the two even closer together. The use of the additional liquidity provided by the European Central Bank (ECB) through longer-term refinancing operations by some banks to stock up on government bonds has also tied the fate of sovereigns and banks closer together. Similarly, the initial plan to use European Financial Stability Facility (EFSF) or European Stability Mechanism (ESM) resources to recapitalize Spanish banks via a loan to the Spanish government bank support agency (FROB) would have exacerbated the Spanish sovereign debt crisis rather than helped to alleviate it, as such a loan would have added another heavy burden to the Spanish debt-to-GDP ratio. These short-term stresses come on top of doubts about the long-term sustainability of the EU Single Market in banking without a regulatory and supervisory framework that matches the geographic perimeter of banks’ activities.