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Thorsten Beck's blog

Not all eggs in the same basket? The role of sectoral specialization in the banking system

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Students of systemic banking distress point to concentration in specific asset classes or sectors as one of the most important factors explaining these crises. The last two global crises are good examples: the simultaneous overexposure of several banks to the U.S. mortgage market initiated the global financial crisis `07–`08 and the overexposure of several banks to sovereign debt of distressed European countries severely deepened the European debt crisis of `11–`12. Given the importance of risk concentration in banking it is therefore surprising how little empirical evidence is available on the relationship between sectoral concentration and bank performance and stability. This absence of research is mainly explained with a lack of data. In recent work, we introduce a new methodology to measure sectoral specialization and differentiation and relate these measures to bank performance and stability (Beck, De Jonghe and Mulier, 2017).

Nascent stock exchanges — tales of success and failure

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Public equity markets are seen as a critical component of a developed financial system, with such markets going back to the 18th and 19th century in many advanced economies.  There have been therefore intensive efforts of donors and local government to establish such markets across the developing world, in the 1980s across Sub-Saharan Africa and in the 1990s across many transition economies.  These efforts, however, have been met with mixed success, illustrated by the statement by a local market practitioner that “an entire year’s worth of trading in the frontier African stock markets is done before lunch on the New York Stock Exchange.”1 On the other extreme are markets such as China, which have developed rapidly over the past two decades, with many listed companies, high trade volume and a broad investor basis.  What explains why some countries have well-developed public equity markets while others have shallow and illiquid markets?

Is there a natural resource curse in finance?

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The natural resource curse has featured prominently in discussions on why many developing countries fail to grow. This curse takes on many flavours — adverse exchange rate effects, underinvestment in human capital and institutions, political conflict and violence, to name just a few. What about the effect on the financial sector? The financial sector has been shown to have a critical role in intermediating domestic savings into domestic investment and in allocating scarce resources effectively, with positive repercussions for economic growth (Levine, 2005). The financial system should thus serve as an important absorption tool for windfall gains, such as arising from natural resource rents. Does it fulfill this role? Previous work has shown that financial systems are less developed in more resource-rich countries (Beck, 2011), but this could be driven by demand, rather than by a supply-side related curse.

Decision day for Greece?

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There have been many days over the past five years characterized as the final decision day, climax in a drawn-out attempt to resolve the Greek debt crisis and lead the country back onto a sustainable growth path. Today’s emergency summit of eurozone’s heads of government seems to be yet another of these days. Will Greece exit the euro or will there be another short-term respite? Are we really in the endgame? In the following, I will argue that whatever outcome, Greece will be on fiscal life support from the European Union for many years to come and that, ultimately, growth can only be restarted in Greece and not with externally imposed adjustment programs.

Banking union in Europe—are we there yet?

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November 4 marked an important milestone in the Eurozone — the ECB took on direct supervision for the 120 largest banks and indirect supervision for all other banks. This came after a rigorous one-year examination of these banks’ books and subjecting their financial situation to different stress scenarios.1 Compared to the discussions right after the onset of the Global Financial Crisis in 2008, this is quite some progress. Six year ago, economists suggesting that the EU or Eurozone would need a single financial safety net were laughed out of the room by lawyers who pointed to the need for a treaty change and the political impossibility to do so. Six years and no treaty change later, the step towards a single supervisory mechanism can therefore be seen as quite an achievement towards a banking union matching the idea of a Single Market in Banking in Europe. On the other hand, the single supervisory mechanism has not been matched with similar progress on the resolution of weak banks on the European rather than national level, and there has been no move on connecting or joining the deposit insurance schemes across the Eurozone. A banking union on one and half pillars compared to the ideal of three pillars; a glass half full or half empty?

When Arm’s Length is Too Far

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In the wake of the global financial crisis, policy-makers’ attention has focused on lending to small and medium-sized enterprises (SMEs) as these were among the most affected firms when the credit cycle turned. SME finance has also attracted the attention of the G20 as it is seen as an important constraint on firm growth in developing, emerging and industrialized countries. Indeed, a joint report by IFC and McKinsey has pointed to a global SME financing gap of over 2 trillion USD (Stein, Goland and Schiff, 2010). Various initiatives, such as the SME Finance Challenge and the SME Finance Forum, have consequently been established to try to alleviate small firms’ funding constraints.

Entrepreneurial savings practices and reinvestment decisions

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Back in 2005, the International Year of Microcredit, it had already become clear that microfinance is much more than microcredit and that other financial services are as, if not even more, important for the poor.  There has been an increasing focus on microsaving products, with several recent studies gauging the effect of providing the poor with access to formal savings accounts.  Looking across the developing world, however, the large majority of the low- and even middle-income households continue to use different forms of informal saving channels. In a recent paper, we explore how these different savings practices are associated with the likelihood that a microentrepreneur reinvests her earnings into her enterprise.

We make use of a novel enterprise survey conducted at the MSE-level in Tanzania. The survey data was collected by the Financial Sector Deepening Trust Tanzania in 2010 from a nationwide representative cross-section of 6,083 micro- and small enterprises. The respondents of the questionnaire are entrepreneurs with an active business as of September 2010. The median initial capital is about 35 USD and average monthly sales are 149 USD. 50 percent of the entrepreneurs are female. More than three quarters of the entrepreneurs in the sample save for business purposes. However there is considerable heterogeneity among saving practices of Tanzanian entrepreneurs. Informal individual saving is the most popular practice among Tanzanian entrepreneurs. 75% of the savers save informal-individually (i.e. under the mattress), whereas around 13% of them save formally. The remainder save their funds via people outside the household such as members of ROSCAs and moneylenders or give them to household members for save-keeping.

Why would savings practices matter for reinvestment decisions?  In the absence of easy access to informal or formal credit, entrepreneurial savings might become important if liquidity needs arise.  However, the extent to which savings are channelled into the company might depend on the ease of access to these savings, where some informal practices (such as ROSCAS or saving with household members) might not offer as easy access as formal savings accounts or saving below the mattress.

Housing Finance across Countries: New Data and Analysis

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Housing finance is a hot topic across the developed and developing world, though for different reasons. With some developed economies just coming out of a housing slump and others still in the middle of it (including my current host country, the Netherlands), often caused by easy and excessive access to mortgage credit before the crisis, households in many developing countries suffer rather from a dearth of long-term financing options. To illustrate this discrepancy, total mortgage debt outstanding in the Netherlands is equivalent to 83% of GDP, whereas it amounts to less than one percent of GDP across many low- and lower-middle-income countries in Asia and Africa. What explains these differences? Are underdeveloped housing finance systems just a symptom of the general shallowness of financial systems across developing countries?  Or are there country factors and policies that specifically explain underdeveloped mortgage markets?

In a recent paper with Anton Badev, Ligia Vado and Simon Walley, we try to answer some of these questions with new data on mortgage depth and penetration. Specifically, drawing on a painstaking exercise of putting together country-level information on the depth of mortgage finance systems across countries and over time and using the recent data on the use of housing finance in the Global Findex database, we explore factors explaining the large cross-country variation in housing finance across the world

Understanding Banks in Emerging Markets: Observing, Asking, or Experimenting?

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Empirical banking research stands and falls with high-quality data. The recent years have seen a large number of new data sources and empirical methodologies being applied to understand how banks operate in the often challenging environment of emerging and developing economies.

A recent conference at the EBRD, jointly organized with the European Banking Center at Tilburg University, the Review of Finance, and the Centre for Economic Policy Research in London, brought together researchers using three types of data sources asking a variety of important questions. Vox has now published an eBook that provides an overview of the different topics discussed during the conference. The studies presented at the conference and in the eBook use data from existing data repositories such as credit registries ('observing'); from large-scale surveys of bank CEOs and bank clients ('asking'); and from randomized experiments ('experimenting'). All three methods try to prise open the banking 'black box' in different ways — each with their own advantages and disadvantages. Using these different data sources allows researchers to address relevant policy questions, and also to better understand the micro-mechanisms of financial contracting and the supply- and demand-side constraints that (potential) borrowers in emerging markets face on a daily basis.

Finance, Growth, and Fragility: What Role for Government?

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When I was invited to give the Maxwell Fry Global Finance Lecture in Birmingham last year, I decided to stay in the tradition of Maxwell Fry (1988) and focus on the role of government in the financial sector, a continuously controversial issue. Maxwell Fry was one of the first economists drawing the attention to the importance of the financial sector for economic development, well before the empirical finance and growth literature took off in the 1990s, while at the same time documenting the negative effect of excessive government intervention into financial markets, also referred to as financial repression.

Financial development has been identified as a key policy area for economic development, while at the same time rapid credit expansion often results in systemic fragility and economic crisis. The critical issue has been the question of what explains the variation in financial sector development (both shallow markets in some, but also over-expanding markets in other countries and periods). Economists have provided three different kinds of answer. In the following I will refer to them as the (i) policy approach, (ii) political approach and (iii) historical approach. While these three views are not incompatible with each other, they imply very different views on the nature and role of government within the financial system.