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Erik Feyen's blog

Which countries face corporate balance sheet vulnerabilities? a novel monitoring framework

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The debt of the nonfinancial corporate sector in emerging and developing economies (EMDEs) has risen significantly since the global financial crisis, raising concerns about financial stability and spillover risks. While monetary easing in developed economies has allowed EMDE corporates to raise substantial financing from global capital markets, the sharp decline in commodity prices since 2014 and lower growth prospects across EMDEs have weighted on their firms’ profitability and debt service capacity.

The current global environment raises questions. How vulnerable is the current financial situation of the EMDE corporate sector?  How has it evolved since the global financial crisis?

Assessing the Impact of the Euro Crisis on Long-Term Credit Provision in Europe

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In the run up to the global financial crisis, European banks significantly increased their lending activities both domestically and outside home markets driven by a pro-cyclical spiral of cheap abundant funding, increasing profitability, and economic growth. In the process, European banks became excessively leveraged and reliant on sources of wholesale short-term funding making them more susceptible to shocks which could force them to adjust their operations abruptly and shrink their balance sheets (Le Lesle (2012)).

When the crisis erupted, a process of bank deleveraging was put into motion and European bank lending standards deteriorated significantly during various episodes of financial stress (Feyen, Kibuuka, and Ötker-Robe (2012), Giannetti, and Laeven, (2012)). First lending standards in Europe deteriorated considerably as the US subprime mortgage crisis unfolded in 2007 and reached a peak in 2009 in the wake of the default of Lehman Brothers in September 2008. Credit supply weakened significantly in 2011Q4 again when the European crisis deepened.

What Drives the Development of the Insurance Sector?

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The insurance sector can play a critical role in financial and economic development in various ways. The sector helps pool risk and reduces the impact of large losses on firms and households—with a beneficial impact on output, investment, innovation, and competition. As financial intermediaries with long investment horizons, life insurance companies can contribute to the provision of long-term finance and more effective risk management. Moreover, the insurance sector can also improve the efficiency of other segments of the financial sector, such as banking and bond markets, by enhancing the value of collateral through property insurance and reducing losses at default through credit guarantees and enhancements.

Indeed, a growing literature finds that there is a causal relationship between insurance sector development and economic growth. However, there have been few studies that conduct look at what drives the development of the insurance sector. Of the literature that does exist, most focuses on the growth of the life sector as measured by life insurance premiums.

A Better Way to Benchmark Financial Sector Development

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 I. The problem of comparing apples and oranges

Comparison of countries lies at the heart of assessing financial sector performance. In doing so, analysts often simply compare financial sector indicators such as credit to the private sector as a percentage of GDP for a given country to a regional average or a set of "representative" countries.

However, such comparisons are only accurate to the extent that the selected benchmark is appropriate. In practice, countries often differ substantially in terms of structural factors that affect financial development. Thus, a simple comparison can lead to inaccurate conclusions.

Figure 1 below displays a simplified example that demonstrates the core of the issue. It shows dots that represent countries with different “structural factors” (e.g. population density) plotted against their “financial development”, i.e. the extent to which the financial sector fosters economic growth via better risk sharing and more productive investments. The figure shows that in terms of financial development, Country B is better than Country A in an absolute sense.