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?
Thorsten Beck's blog
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.
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 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
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.
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.
The relationship between finance, inequality and poverty is a controversial one. While some observers attribute not only the crisis but also rising inequality in many Western countries to the rise of the financial system (e.g. Krugman, 2009), others see an important role of the financial sector on the poverty alleviation agenda (World Bank, 2008). But financial sector policies are not only controversial on the macro, but also micro-level. While increasing access to credit services through microfinance had for a long time a positive connotation, this has also been questioned after recent events in Andhra Pradesh, with critics charging that excessive interest rates hold the poor back in poverty. In recent work with Meghana Ayyagari and Mohammad Hoseini, we find strong evidence for financial sector deepening having contributed to the reduction of rural poverty rates across India by enabling more entrepreneurship in the rural areas and by enticing inter-state migration into the tertiary sector.
Group identity in the form of family, ethnicity, or gender is a powerful predictor of social preferences, as shown by theory and empirical work. In particular, people generally favor in-group over out-group members. Such favoritism can have positive or negative repercussions. On the one hand, it can lead to inefficient transactions and lost opportunities. On the other hand, group identity may also entail trust, reciprocity, and efficiency due to shared norms and understandings. In recent research with Patrick Behr and Andreas Madestam, we gauge these opposing hypotheses, examining one important form of group identity, gender, and the consequences of own-gender preferences for outcomes in the credit market. We use microcredit transactions as they are an ideal ground to test these different hypotheses, relying heavily on transaction between loan officers and borrowers.
The crisis is Cyprus is still unfolding and the final resolution might still have some way to go, but the events in Nicosia and Brussels already offer some first lessons. And these lessons look certainly familiar to those who have studied previous crises. Bets are that Cyprus will not be the Troika’s last patient, with one South European finance minister already dreading the moment where he might be in a situation like his Cypriot colleague. Even more important, thus to analyze the on-going Cyprus crisis resolution for insights into where the resolution of the Eurozone crisis might be headed and what needs to be done.
The Global Financial Crisis of 2007 to 2009 has spurred renewed widespread debates on the “bright” and “dark” sides of financial innovation. The traditional innovation-growth view posits that financial innovations help reduce agency costs, facilitate risk sharing, complete the market, and ultimately improve allocative efficiency and economic growth. The innovation-fragility view, by contrast, has identified financial innovations as the root cause of the recent Global Financial Crisis, by leading to an unprecedented credit expansion fueling a boom-bust cycle in housing prices, by engineering securities perceived to be safe but exposed to neglected risks, and by helping banks and investment banks design structured products to exploit investors’ misunderstandings of financial markets and exploit regulatory arbitrage possibilities. Paul Volcker, former chairman of the Federal Reserve, claims that he can find very little evidence that the financial innovations in recent years have done anything to boost the economy.