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The political economy of bank lending: evidence from an emerging market

Claudia Ruiz's picture

Our paper studies the existence of political rents in bank lending in Mexico. Unlike prior studies examining political rent seeking in public sector banks, we focus on an economy with a fully privatized banking sector where the existence of political rent seeking is not obvious.

The data that we use corresponds to the universe of commercial bank loans in Mexico from 2003 to 2012. We classify firms as politically connected if they are located in a state that elected a senator who at a particular time chaired an important senate committee. 1 We then narrow down our definition of political connection by focusing on firms that, in addition to being headquartered in the same state, operate in an industry related to the purview of the chairman’s commission, or are located in the same municipality in which the chairman lives. Having this classification of political connection allows us to exploit within-firm variation over time, and compare a firm’s loan terms and performance when it is politically connected and when it is not.

Leveraging urbanization to fund sustainable development and financial inclusion

Biagio Bossone's picture

Urbanization, when combined with innovations in payments technologies (virtual and complementary currencies), provides an opportunity to finance sustainable city development funds and achieve financial inclusion for urban communities. Virtual and complementary currencies (in paper, electronic, or mobile forms) are representations of value (IMF, 2016) that urban populations can purchase with official currency and use in their daily intra-city payments transactions. Doing so would amount to intra-city bartering, leveraging urban population density to finance a city sustainable development fund with the official currency saved. This fund, equivalent to bank reserves but under community control, can in turn be leveraged to finance fixed assets (dwellings) and physical infrastructures in partnership with investors. By banking official currency through the sale of an appropriate means of intra-community payments (paper, electronic, or mobile), the urban unbanked could be financially included.

Do securities trading by banks crowd out lending to the real sector?

José-Luis Peydró's picture

In “Securities Trading by Banks and Credit Supply: Micro-Evidence”, we explore the effects of the financial crisis on securities trading by commercial banks and the subsequent effect of the latter in credit supply. We find that banks with higher trading expertise increase their investments in securities in crises and decrease their supply of credit.

Banks today hold a considerable amount of securities among their assets. However, there is an important policy and academic debate as to whether they should be able to do so. The investment behavior of banks is portrayed in Figure 1, where was a sharp decline in price in the security around 2009; at the same time, German banks with higher trading expertise increased their holdings of said security.

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.

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