Syndicate content

Deposit Insurance and the Global Financial Crisis

Asli Demirgüç-Kunt's picture

How does deposit insurance affect bank stability?  This is a question that has been around for a while but has come up again after the global financial crisis.  In response to the crisis, a number of countries substantially increased the coverage of their safety nets in order to restore market confidence and to avert potential contagious runs on their banking sectors.  Critiques worry that such actions are likely to further undermine market discipline, causing more instability down the line. My earlier research on this issue suggests that on average deposit insurance can exacerbate moral hazard problems in bank lending, making systems more fragile.  In other words, particularly in institutionally under-developed countries, banks have a tendency to exploit the availability of insured deposits and increase their risk, making the financial system more crises prone.  This is ironic since deposit insurance is supposed to make the systems more stable, not less.

But what if the impact of deposit insurance on stability varies depending on the economic conditions? Does deposit insurance help stabilize banking systems by enhancing depositor confidence during turbulent times?

How Can Finance Influence Productivity of Agricultural Firms?

Claudia Ruiz's picture

Worldwide, agriculture is the main source of income among the rural poor. Relative to other sectors, agricultural growth can reduce rural poverty rates faster and more effectively (Christiaensen and others 2011). As discussed in the GFDR 2014, one relevant vehicle to achieve growth in the sector may be finance.

Farmers’ decisions to invest and to produce are closely influenced by access to financial instruments. If appropriate risk mitigation products are lacking, or if available financial instruments do not match farmers’ needs, farmers may be discouraged to adopt better technologies, to purchase agricultural inputs, or to make other decisions that can improve the efficiency of their businesses. Improving access to finance can increase farmers’ investment choices and provide them with more effective tools to manage risks (Karlan and others 2012a, Cai and others 2009).

Does increased access to financial services promote microenterprise growth?

Miriam Bruhn's picture

Microcredit has become a buzzword over the past couple of decades and many have hoped that small loans would help microenterprises grow and raise the incomes of their owners. Recently, a number of rigorous studies have measured the effect of credit on microenterprises. The results paint a nuanced picture; with most studies showing no strong impact on microenterprise growth (see Chapter 3 of the World Bank Group’s Global Financial Development Report 2014 for a summary of these findings).

Researches have uncovered several reasons why microcredit may not lead to the expected increase in firm growth. For example, to mitigate default risk, microloans often have joint liability. However, joint liability may discourage investment because group members have to pay more if a fellow borrower makes a risky investment that goes bad, but they do not enjoy a share of the profits if the investment yields returns. Also, looking beyond microcredit, recent studies suggest that providing other financial instruments, such as savings products and microinsurance, can spur microenterprise investment and growth.

Housing Finance across Countries: New Data and Analysis

Thorsten Beck's picture

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

An Analysis of National Financial Inclusion Strategies

Martin Cihak's picture

More than 50 countries have recently published explicit financial inclusion strategies and committed to formal targets for financial inclusion. These strategies and commitments reflect a growing recognition of the role of financial inclusion in reducing poverty and boosting shared prosperity. The Financial Inclusion Strategies Database—one of the supporting materials for the World Bank Group’s Global Financial Development Report 2014—summarizes the national strategies in a format that eases comparisons across countries, thus assisting research in this area. In this post, we present an introductory statistical analysis of the dataset.

Demand collapse, not credit crunch, was hurting Eastern European firms the most in the crisis

Rong Qian's picture

While there is a consensus among researchers and policy makers that the 2008–2009 crisis was triggered by financial market disruptions in the United States, there is little agreement on whether the transmission of the crisis and the subsequent prolonged recession were caused by credit factors or a collapse of demand for goods and services. On the one hand, a credit crunch, defined as a reduction in the ability of firms to get loans or a sudden tightening of the conditions required to obtain a bank loan, squeezes firms’ working capital and hurts their production. On the other hand, adverse demand shocks to firms come from declines in demand for firms’ products and services. Each type of factor has fundamentally different policy implications. If credit factors are found to play the main role, the solution would be to provide more and cheaper credit. But if demand factors are the main drivers, the focus should be on boosting investors’ and consumers’ confidence. Interestingly, most of the effort to understand the impact of the crisis focuses on credit and not on demand.

Understanding Banks in Emerging Markets: Observing, Asking, or Experimenting?

Thorsten Beck's picture

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.

What financial products do Muslim adults want?

Asli Demirgüç-Kunt's picture

"Islamic finance" is a phrase that you hear a lot in development circles these days. Indeed, many policymakers are interested in the potential of Sharia-compliant financial services to expand financial inclusion among Muslims adults. Our colleagues down the street are no exception:  earlier this year the International Finance Corporation (IFC) announced its first partnership with an Islamic finance institution in Sub-Saharan Africa, a $5 million equity investment with Gulf African Bank in Kenya with the explicit goal of expanding Sharia-compliant banking products and services to small and medium businesses.

Yet little is actually known about the degree to which individual Muslims are not accessing conventional financial institutions, and even less about how much they demand and use Sharia-compliant financial products, particularly within the realm of household finance. In an attempt to add some empirical rigor to the Islamic finance conversation, we recently published a Working Paper and Findex Note that explore these questions using Findex and Gallup World Poll data.

Fresh off the Press: Global Financial Development Report 2014

Martin Cihak's picture

Global Financial Development Report 2014Today, the World Bank Group is issuing Global Financial Development Report 2014: Financial Inclusion. The report is the second in a new series on global financial development. It follows up on last year’s inaugural issue, which focused on rethinking the state’s role in finance.

Financial inclusion is a logical choice for the report’s theme. Access to financial services is crucial for reducing poverty and boosting shared prosperity, as demonstrated by recently available data and evidence showcased in the report. At the same time, real-world financial systems are far from inclusive. Globally, 2.5 billion people—more than a half of the world’s adult population—have no bank accounts, lacking efficient mechanisms to save money and pay bills. A vast majority of the “unbanked” live in the developing world (figure 1).
The report comes at a propitious time, because financial inclusion has become a subject of heightened interest. Over 50 countries have recently committed to formal targets and goals for financial inclusion. And last month, during the World Bank-IMF Annual Meetings, President Jim Yong Kim put the issue into spotlight by calling for universal financial access for all working-age adults by 2020.

Will hard cash go the way of the compact disk?

Ignacio Mas's picture

Hard cash certainly has its drawbacks. Poor people mired in a cash economy find it difficult, in times of need, to support or seek support from distant relatives and friends. The size of the market they can sell their products and wares into or source their inputs from is limited by how far they can easily and securely transport cash. They are captive to local financial organizations and moneylenders, because more distant financial institutions don’t find it cost effective to go collect their saved-up cash and have no visibility of their prior cash-based financial histories on which they might otherwise grant credit.

Pages