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Financial Sector

The impact of the global financial crisis on the use of long-term finance

Thierry Tressel's picture

In the aftermath of the Global Financial Crisis, there were heightened concerns that a reduced availability of long-term finance and the resulting rollover risks would adversely affect the performance of small and medium-sized firms and hamper large fixed investments. Policy makers argued that, as a result, developing countries’ ability to sustain rates of economic growth sufficiently high to reduce poverty and ensure shared prosperity would be diminished. Recently, as corporates of emerging markets have benefited from favorable global liquidity conditions to issue long-term bonds, policy discussions focused on the stability risks of high leverage that could materialize when monetary conditions normalize.

Eighteenth annual international banking conference: The future of large, internationally active banks

Asli Demirgüç-Kunt's picture

Also available in: Español | العربية

international conference cover and logo image

On November 5–6, the Federal Reserve Bank of Chicago hosted its annual International Banking Conference, which we at the Bank co-sponsored. This year’s topic “The Future of Large, Internationally Active Banks,” which we picked to correspond to the topic of our upcoming Global Financial Development Report (GFDR) is very timely and important given that regulatory reforms addressing large, international banks, which will affect the economies around the world, are still ongoing. For example, just a few days after the conference, on November 9, the Financial Stability Board (FSB) issued its final Total Loss-Absorbing Capacity (TLAC) standards, which is expected to make banking systems more resilient by addressing the too-big-to-fail issue and was one of the issues hotly debated throughout the conference.

The determinants of long-term versus short-term bank credit in EU countries

Thierry Tressel's picture

In a new background paper prepared for the 2015/2016 Global Financial Development Report on Long-Term Finance, Haelim Park, Thierry Tressel and Claudia Ruiz analyze the growth of bank credit to firms in the emerging and advanced countries of the European Union.[1] By classifying loans according to their maturity, they document how long-term loans to enterprises in the emerging countries of the EU were growing substantially faster than in the rest of the region during the pre-crisis years.[2]

Launching the 2014 Global Findex microdata

Asli Demirgüç-Kunt's picture

I am pleased to announce the release of the 2014 Global Findex microdata, which includes individual-level responses from almost 150,000 adults around the world. You can download it all here.

Drawing on interviews with adults in 143 countries, the 2014 Findex database measures account ownership at banks and other financial institutions and with mobile money providers, and explores how adults save, borrow, make payments, and manage risk. For each of these countries, the microdata unpacks about 1,000 individual-level survey observations.

With this data, which was collected by Gallup, Inc. in calendar year 2014, you can dive deeper into the indicators presented in the main Findex database. For example, the country-level indicators explore the income gap by looking at adults in the poorest 40 percent and richest 60 percent of households, but the microdata splits it into quintiles. The microdata also covers topics that weren’t included on the country-level, such as unbanked adults' reasons for lacking an account.

For a more detailed discussion of Global Findex findings and methodology, visit our website and see our working paper.

I hope you will make good use of the data, and share your findings with us on Twitter @GlobalFindex.

Which financial intermediaries provide long-term finance?

Sergio Schmukler's picture

This post is part of a series highlighting the key findings of the Global Financial Development Report 2015 | 2016: Long-Term Finance. You can view the entire series at gfdr2015.

Policy makers debate about which financial institutions they need to foster to create a supply of long-term finance. One difficulty in this debate is the lack of evidence about the behavior of different types of financial intermediaries. Chapter 4 of the Global Financial Development Report (GFDR) tries to fill this void by compiling different pieces of evidence from around the world.

Which markets provide long-term finance?

Sergio Schmukler's picture

This post is part of a series highlighting the key findings of the Global Financial Development Report 2015 | 2016: Long-Term Finance. You can view the entire series at gfdr2015.

Many governments are concerned about providing long-term finance for corporations. In fact, having access to long-term funds allows firms to finance large investments as well as to reduce rollover and liquidity risks and the potential for runs that could lead to costly crises. Moreover, “short-termism” explains several well-known financial crises in both developing and developed economies. But to what extent do corporations borrow long term? And in which markets?

To help understand whether firms from different countries access short- and long-term financing, Chapter 3 of the Global Financial Development Report (GFDR) 2015 and the respective background paper (Cortina, Didier, and Schmukler, 2015) document the use of equity, bond, and syndicated loan markets by firms from around the world between 1991 and 2013.

Households’ use of long-term finance

Claudia Ruiz's picture

This post is part of a series highlighting the key findings of the Global Financial Development Report 2015 | 2016: Long-Term Finance. You can view the entire series at gfdr2015.

The second part of Chapter 2 of the 2015 Global Financial Development Report examines the use of long-term finance by households. The section first discusses the main reasons that households use long-term finance products, while highlighting the risks inherent to their use. Making use of recent data initiatives, it then shows how usage of long-term finance varies substantially both across and within countries, and then outlines a set of policy recommendations that can help develop and promote long-term finance markets.

Why would households use long-term finance? And what are the risks they can incur?

Long-term finance offers households various tools to achieve their changing objectives throughout their life-cycle. Products such as pensions, insurance, or annuities can help households prepare for retirement, smooth their life cycle income, and insure against various life cycle risks. Student loans or mortgages can make lumpy but potentially high-yield investments affordable to households. Long-term savings instruments can allow households to accumulate and reap term premiums.

Firms’ use of long-term finance: why, how, and what to do about it?

Miriam Bruhn's picture

This post is part of a series highlighting the key findings of the Global Financial Development Report 2015 | 2016: Long-Term Finance. You can view all the posts in the series at gfdr2015.

The first part of Chapter 2 of the 2015 Global Financial Development Report examines the use of long-term finance from the firm’s perspective. It draws on theoretical and empirical studies to ask why firms would want to use long-term finance and how this use affects their performance. It also relies on the most recent data and evidence to show how use of long-term finance varies across countries and discusses what governments can do to promote the use of long-term finance by firms. Here are the main messages regarding firms’ use of long-term finance:

Firms tend to match the maturity of their assets and liabilities, and thus they often use long-term debt to make long-term investments, such as purchases of fixed assets or equipment. Long-term finance also offers protection from credit supply shocks and having to refinance in bad times. But not all firms need long-term finance. For example, firms with good growth opportunities may prefer short-term debt since they may want to refinance their debt frequently to obtain better loan terms after they have experienced a positive shock.

Understanding the use of long-term finance

Maria Soledad Martinez Peria's picture

This blog post is part of a series highlighting the key findings of the Global Financial Development Report 2015 | 2016: Long-Term Finance. You can view all the posts in the series at http://blogs.worldbank.org/allaboutfinance/category/tags/gfdr2015.

Long-term finance—defined here as any source of funding with maturity exceeding at least one year—can contribute to economic growth and shared prosperity in multiple ways. Most importantly, it reduces firms’ exposure to rollover risks, enabling them to undertake longer-term fixed investments and it allows households to smooth income over their life cycle and to benefit from higher long-term returns on their savings.

But how are we to think about the actual use of long-term finance by firms and households?  Chapter 1 of the 2015 Global Financial Development Report presents a conceptual framework for understanding the use of long-term finance summarized in Figure 1 below. In essence, the use of long-term finance can be best understood as a risk-sharing problem between providers and users of finance. Long-term finance shifts risk to the providers because they have to bear the fluctuations in the probability of default and the loss in the event of default, along with other changing conditions in financial markets, such as interest rate risk. In contrast, short-term finance shifts risk to users because it forces them to roll over financing constantly. Therefore, long-term finance may not always be optimal. Providers and users will decide how they share the risk involved in financing at different maturities, depending on their needs.

Hot off the Press: The Global Financial Development Report 2015/2016 on Long-Term Finance

Asli Demirgüç-Kunt's picture

GFDR 2015 Book CoverIn recent years, long-term finance has increasingly attracted interest from policy makers, researchers, and other financial sector stakeholders. Policymakers are often concerned when they see limited use of long-term finance in their countries since limited availability may adversely affect growth and welfare.  These concerns were further heightened after the global financial crisis since availability of long-term finance was perceived to be reduced following the crisis, adversely affecting the performance of small and medium enterprises and widening financing gaps for investment.

In fact, ensuring more and better long-term finance has become one of the priorities for the post 2015-Agenda (United Nations 2013). Concerns about the detrimental development effects of a potentially constrained supply of long-term finance have been voiced in the Group of Twenty (G-20) meetings and by the Group of Thirty and ensuring more and better long-term finance is one of the priorities for the post 2015-Agenda (United Nations 2013). This year’s Global Financial Development Report (GFDR), the third in the series, is a synthesis of recent and ongoing research aiming to identify those policies that work to promote long-term finance and those that do not, as well as areas where more evidence is still needed.

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