In the aftermath of the global financial crisis, there has been much criticism of compensation practices at banks. Although much of this debate has focused on executive compensation (see the recent debate on this blog), there is a growing recognition that non-equity incentives for loan officers and other employees at the lower tiers of a bank’s corporate hierarchy may share some of the blame — volume incentives for mortgage brokers in the United States that rewarded high-risk lending at wildly unsustainable terms are a particularly striking case in point.
The impact of bank competition on financial markets and firms is an important topic of concern for policymakers and researchers alike. Interest in this topic intensified during the recent global financial crisis as researchers and policymakers questioned whether high competition was partly to blame.1 Those against bank competition make two main arguments. First, competition may lead to risky lending practices as financial institutions search for higher margins. The increase in subprime lending is an example of such behavior prior to the recent crisis. Second, higher competition may erode banks’ profit margins and leave them with insufficient capital cushions, something that also played a role in the recent crisis. On the other hand, those in favor of competition argue that it can improve access to finance, especially for small and medium enterprises, and that any negative effects on stability are better addressed by proper regulation and supervision of financial institutions.
The past two decades have seen a large increase in foreign bank entry across the globe, a trend that has been especially strong in the transition countries of Central and Eastern Europe and in Latin America. The effects of foreign bank participation on lending to small and medium enterprises (SMEs) have been a controversial issue among academics and policy makers alike. Critical issues in this debate have been different clienteles and lending techniques of domestic and foreign banks. Most prominently, Mian (2006) shows that clients of foreign banks in Pakistan are of larger size, more transparent, in larger cities and more likely to be foreign-owned, inferring from that the lending techniques foreign banks apply. This analysis, however, confounds two effects – differences in clientele and differences in lending techniques. Do foreign banks use different lending techniques because they have different clienteles or do they use different lending techniques even for the same customers of domestic banks? In recent work with my Tilburg colleagues Vasso Ioannidou and Larissa Schäfer, we use data from the Bolivian credit registry and focus on a sample of firms that borrow from domestic and foreign banks in the same month to isolate the effects of different lending techniques of banks of different ownership (Beck, Ioannidou and Schäfer, 2012).
In a recent paper, George Clarke, Gregory Kisunko and I use data from firms in Eastern Europe, a region that was especially hard hit by the global financial crisis, to study which firms survived and how they did it. Our first data source is a panel of firms from 23 countries that were interviewed in 2002, 2005, and 2008-9 as part of the Business Environment and Enterprise Performance Surveys (BEEPS). It allows us to document how financial constraints evolved over time and to see how firm and country characteristics affected those constraints during the crisis. The second dataset, from the Financial Crisis Surveys (FCS) that were conducted as follow-ups to the BEEPS in six countries (Bulgaria, Hungary, Latvia, Lithuania, Romania and Turkey) in 2009, allows us to look at how changes in access to financing affected firm survival rates during the crisis.
Most observers have realized by now that a core problem of the Eurocrisis is the close interconnection between banking and sovereign fragility. The ongoing sovereign debt crisis in Europe continues to put strains on banks’ balance sheets — full of government bonds — while continuous bank fragility increases (contingent and more and more real) government liabilities. Rather than disentangling the sovereign debt and bank crises, recent policy decisions have tied the two even closer together. The use of the additional liquidity provided by the European Central Bank (ECB) through longer-term refinancing operations by some banks to stock up on government bonds has also tied the fate of sovereigns and banks closer together. Similarly, the initial plan to use European Financial Stability Facility (EFSF) or European Stability Mechanism (ESM) resources to recapitalize Spanish banks via a loan to the Spanish government bank support agency (FROB) would have exacerbated the Spanish sovereign debt crisis rather than helped to alleviate it, as such a loan would have added another heavy burden to the Spanish debt-to-GDP ratio. These short-term stresses come on top of doubts about the long-term sustainability of the EU Single Market in banking without a regulatory and supervisory framework that matches the geographic perimeter of banks’ activities.
For many economists and policy-makers, the lack of disaggregated information is a major obstacle to understanding how financial funds flow between geographic regions within a country. Most of the available savings and credit data come from macro statistics or surveys, and they only allow the study of financial systems in a broad perspective.
Fortunately, this will no longer be the case for researchers and policy-makers interested in the Mexican financial system. This August, Mexico's National Banking and Exchange Commission (CNBV), in collaboration with the Consortium on Financial Systems and Poverty (CFSP), will make public for the first time a dataset with historical information on savings and credit balances disaggregated by municipality (Mexico´s Municipalities Savings and Intermediation dataset or MSI dataset). This dataset is part of the project A Regional Approach to Financial Savings and Intermediation: Understanding the Mexican Financial System at the Municipality Level.
Today, Gallup hosted a conference on “Evidence and Impact: Closing the Gender Data Gap” where Secretary of State Hillary Clinton , World Bank President Jim Kim, and other leaders emphasized the importance and relative lack of gender-sensitive data to support policies for improving the lives of women and girls. Secretary Clinton remarked to a packed house that “data not only measures progress, it inspires it.” She asked participants, national governments, and the international community at large to invest in gender-sensitive data collection, use, and publication. Jim Clifton, the CEO of Gallup, spoke about the danger of creating policy simply based on our perceptions of what women want and need.
Ask farmers from low-income countries why they don’t purchase critical inputs, such as improved seeds and fertilizer, and they will most likely tell you that they “lack the funds” to do so. While this may be a catch-all excuse, the answer is all the more surprising given the high marginal returns that these investments usually entail.
One solution to this liquidity problem is to encourage formal savings. Low-income households do save informally in more expensive and risky ways (holding cash at home, purchasing livestock, etc.) but they find it hard to save at a financial institution. There are many reasons for this behavior. Absent the more recent technology-based solutions, such as mobile banking or banking correspondents, transaction costs can be high given the sometimes substantial distances to branches and the costly and unreliable transport. In addition, individuals may lack knowledge about the benefits of formal savings and may not be familiar with account-opening procedures. Banks don’t typically make much money with savings products targeted to low-income products unless they are loaded with hidden fees and commissions, in which case potential customers may be better off not saving at all. (One of these days I’ll blog about an audit study we are doing in Mexico to understand the quality of information and financial products offered to low-income households.)
In today’s New York Times, Nicholas Kristof gives the example of a family in Malawi that improved their lives as the result of a village savings group. We know that access to banks, cooperatives, and microfinance institutions has allowed many adults like the Nasoni family to safely save for the future, invest in an education or insure against risk, but just how widespread is the use of formal financial products worldwide? How do the barriers to access vary across regions? And how do the unbanked manage their finances?
In the past, the view of financial inclusion around the world had been incomplete. With the release of the Global Financial Inclusion (Global Findex) Database we now have a comprehensive, individual-level, and publicly-available database that allows for comparisons across 148 economies of how adults around the world manage save, borrow, make payments and manage risk. As cited in the article, the Global Findex data shows that more than 2.5 billion adults around the world don’t have a bank account.
Low-income individuals in developing economies face barriers that limit access to banking. In some countries, a common requisite of banks is that would-be borrowers must have official proof of income. However, this requirement excludes from the banking system all the informal households whose members work in activities that are not registered with the government, and who, due to the nature of their occupations, lack income documents. A case in point is that of Mexico. In this middle-income country, informal households represent more than half the population.
In Mexico, banks have been hesitant to lend to informal clients since they are considered riskier and less profitable. Nevertheless, and although they find it difficult to obtain credit from traditional banks, informal households tend to be active borrowers with alternative suppliers. Informal borrowers rely heavily on loans from relatives and friends, and on more expensive credit suppliers, such as pawn shops and moneylenders.