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Introducing the Global Financial Development Report

Martin Cihak's picture

How should we measure and assess financial development around the globe? Why has financial development progressed so quickly in some regions and countries while seriously lagging in other parts of the world? At what point does the financial sector become too large or too complex? What mix of banks, other financial institutions, and financial markets is the best from the broader development perspective? How to ensure healthy competition in the provision of financial services? Which policies help in supporting robust financial development, and which ones do not? And which ones help in providing people and firms with better access to finance?

These are just some examples of questions to be addressed by a new annual publication, the Global Financial Development Report (GFDR), a flagship report of the World Bank Group. As highlighted by its title, the report will have global coverage with a focus on finance and an explicit developmental angle. The GFDR will provide an overview and assessment of financial sector development around the world, with a particular attention on medium- and low-income countries. The preliminary target release date for the inaugural issue, GFDR 2013, is September 2012.

Should State Banks Continue to Play a Role in the Middle East and North Africa?

Roberto Rocha's picture

In the past three decades the role of state-owned banks has been sharply reduced in most emerging economies. This reflects a general disappointment with their financial performance and contribution to financial and economic development, especially in countries where they dominated the banking system. But despite their loss of market share, state banks still play a substantial role in many regions, especially in East Asia, the Middle East and North Africa, and South Asia (figure 1).

Figure 1 Share of state banks in total assets by region, various years, 1970–2005
(percent)

 

The arguments put forward to justify the continuing presence of state banks have included market failures (resulting from asymmetric information and poor enforcement of contracts) that restrict access to credit; the provision of essential financial services in remote areas (where supply may be restricted by large fixed costs); and the provision of countercyclical finance to prevent an excessive contraction of credit during a financial crisis. These arguments may well justify policy interventions in many countries, although it does not necessarily follow that state banks are the optimal intervention. Moreover, even where the presence of state banks may be justified, policy makers still face the challenge of ensuring clear mandates and sound governance structures in order to minimize political interference and avoid large financial losses.

Where Do Women Work?

Mary Hallward-Driemeier's picture

The economic empowerment of women is gaining prominence in the development agenda. It is reflected in Millennium Development Goal 3 and will be the focus of the World Bank’s World Development Report 2012. Expanding women’s access to income generating opportunities is a key part of this objective. An important starting point is to understand where women work.

Two figures based on data from household and labor force surveys in 137 low- and middle-income countries help answer this question. Figure 1, focused only on women, reports the shares active in different types of employment. Figure 2, focused on the nonagricultural labor force (male and female), reports the share of workers in each employment category who are women. Thus the first shows the distribution of women across types of work, and the second the differences in the rates at which men and women are active in the same type of employment.

New Ideas in Business Growth

Miriam Bruhn's picture

My colleague Bilal Zia and I organized a conference on New Ideas in Business Growth: Financial Literacy, Firm Dynamics and Entrepreneurial Environment that took place at the World Bank last Wednesday. The conference brought together researchers and policy makers in the area of private sector development to share new findings about the types of policy interventions that are effective at promoting business growth. We decided to focus the discussion on three topics that have recently received increased attention from both a research and a policy angle: 1) business and financial literacy training 2) the business environment and 3) corporate governance and firm dynamics. The selection of these three topics also raised a larger question in my mind—should the research community spend so much of its effort on microenterprises, when larger firms may have much higher growth potential? That’s a question I’ll return to at the end of the post.

In recent years, many governments, international institutions, and NGOs around the world have been providing business and financial literacy training for entrepreneurs. However, so far, we know relatively little about the impact of this training on business performance and growth. In an effort to contribute to filling this knowledge gap, Bilal and I conducted a randomized control trial in Bosnia-Herzegovina, where we collaborated with a microfinance institution and an NGO to provide business and financial literacy training to young entrepreneurs.

What Drives the Development of the Insurance Sector?

Erik Feyen's picture

The insurance sector can play a critical role in financial and economic development in various ways. The sector helps pool risk and reduces the impact of large losses on firms and households—with a beneficial impact on output, investment, innovation, and competition. As financial intermediaries with long investment horizons, life insurance companies can contribute to the provision of long-term finance and more effective risk management. Moreover, the insurance sector can also improve the efficiency of other segments of the financial sector, such as banking and bond markets, by enhancing the value of collateral through property insurance and reducing losses at default through credit guarantees and enhancements.

Indeed, a growing literature finds that there is a causal relationship between insurance sector development and economic growth. However, there have been few studies that conduct look at what drives the development of the insurance sector. Of the literature that does exist, most focuses on the growth of the life sector as measured by life insurance premiums.

Ladies First? Understanding Whose Job is Vulnerable in a Crisis

Mary Hallward-Driemeier's picture

In an economic crisis, whose job do employers put on the chopping block first? Many gender equality advocates and policymakers are concerned that “women are at risk of being hired last and dismissed first” during crises. This concern is fuelled by evidence showing that employers often discriminate against women even during less volatile times, that women often bear the brunt of coping with economic shocks, and that, in many countries, gender norms prioritize men’s employment over women’s. Despite a lot of rhetoric, existing studies of the labor market consequences of macroeconomic crises have yielded ambiguous conclusions about the differential impact across genders. Might claims about women’s vulnerability be exaggerated?

Most studies that look at the distributional impact of crises rely on household and labor force data. However, these data cannot distinguish between two mechanisms that could account for gender differences in employment adjustment. First, differences in vulnerability could be the result of sorting by gender into firms and occupations that differ in their vulnerability to crises. In this case, the effect of gender is indirect; women may take jobs that are relatively more or less vulnerable. Second, there could be differential treatment of men and women workers within the same firm. Faced with the need to adjust, do employers treat women differently, either by firing them first or cutting their wages more? It is this second mechanism that underpins concerns about discrimination. To distinguish between these mechanisms, we need to compare the employment prospects and wage trajectories of men and women both across and within firms—which means we need firm-level data.

Do We Need Big Banks?

Asli Demirgüç-Kunt's picture

In the past several decades banks have grown relentlessly. Many have become very large—both in absolute terms and relative to their economies. During the recent financial crisis it became apparent that large bank size can imply large risks to a country’s public finances. In Iceland failures of large banks in 2008 triggered a national bankruptcy. In Ireland the distress of large banks forced the country to seek financial assistance from the European Union and International Monetary Fund in 2010.

An obvious solution to the public finance risks posed by large banks is to force them to downsize or split up. In the aftermath of the EU bailout Ireland will probably be required to considerably downsize its banks, reflecting its relatively small national economy. In the United Kingdom the Bank of England has been active in a debate on whether major U.K. banks need to be split up to reduce risks to the British treasury. In the United States the Wall Street Reform and Consumer Protection Act (or Dodd-Frank Act) passed in July 2010 prohibits bank mergers that result in a bank with total liabilities exceeding 10 percent of the aggregate consolidated liabilities of all financial companies, to prevent the emergence of an oversized bank.

So public finance risks of systemically large banks are obvious. But what are some of the other costs (and benefits) associated with bank size? This is the question Harry Huizinga and I try to address in a recent paper. Specifically, we look at how large banks are different in three key areas:

How Corporate Stress Testing Can Enhance Bank Stress Testing

Inessa Love's picture

The Financial Sector Assessment Program (FSAP) performs bank stress testing to evaluate the resilience of the banking sector to different unexpected shocks, including sharp changes in the interest rate or exchange rate. In addition to macroeconomic shocks like these, the soundness of the banking sector also depends on the soundness of bank borrowers: systemic shocks to borrowers’ ability to repay loans is transmitted to banks through corporate defaults.

For example, an interest rate shock may affect banks directly, through its impact on the income and expenses from their lending practices. In addition, if the interest rate shock affects borrowers’ ability to repay, the shock will also be transmitted to the banking sector through an increase in corporate defaults. Similarly, a negative shock to corporate earnings will manifest as higher default rates and also adversely affect bank stability.

Assessment of corporate vulnerability thus would strengthen the analysis of bank vulnerability to shocks and should play an important role in bank stress testing. Unfortunately, assessment of corporate vulnerability is rarely included in the FSAP’s standard bank stress testing.

Microcredit, microsavings…but what about micropayments?

Ignacio Mas's picture

Why is the term microfinance still used by so many as if it were synonymous with microcredit? Credit is only one form of finance. All the more thoughtful commentators on the Andhra Pradesh crisis agree that debt should not be the only financing option available to poor people.

In a recent blog post, my colleague Jake Kendall and I explained how the Financial Services for the Poor team at the Bill & Melinda Gates Foundation focuses on savings because it’s an option that everyone should have and because we felt donors have neglected it in the past.

But there is another service that has received even less attention from the microfinance community: payments. When is the last time you were at a microfinance conference and someone mentioned the payment needs of the poor with any degree of passion? And why do academic researchers devote so little attention to it?

What Explains Comovement in Stock Market Returns during the 2007–08 Crisis?

Maria Soledad Martinez Peria's picture

The 2007–08 financial crisis was one of historic dimensions—few would dispute that it was one of the broadest, deepest, and most complex crises since the Great Depression. Initially, however, the crisis seemed to be of rather limited scope, and many thought countries would be able to “decouple” from events in the United States. But after Lehman Brothers collapsed in September 2008, the crisis spread rapidly across institutions, markets, and borders. There were massive failures of financial institutions and a staggering collapse in asset values in developed and developing countries alike. Nonetheless, the reactions of stock markets varied widely around the globe, with some countries showing greater comovement with the US market than others (figure 1).

Together with Tatiana Didier, we empirically investigate the factors that determine comovement between stock market returns in the United States and those in 83 other countries in a recent paper. In particular, we evaluate the extent to which comovement with US stock market returns during this recent turbulent period was driven by real linkages, was driven by financial linkages, or was the consequence of “demonstration effects” (see Goldstein 1998 and Masson 1998), in which investors became aware of vulnerabilities present in the US context and reassessed the risks in other countries, reevaluating the value of their stockholdings.

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