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Financial Sector

Zooming out for better clarity: sovereign asset and liability management

M. Coskun Cangoz's picture

The balance sheet of sovereign entities is far more complex than the balance sheet of private companies. For example, the institutions that manage the assets of a sovereign are different than those which oversee the liabilities, often with different mandates. Other issues include the definition of the “sovereign” and the scope of its balance sheet, the complex valuation of tangible assets and recognition of financial instruments, negative net worth, incomplete recording, and many others. As a result, unlike private companies, most governments manage their balance sheets as separate sub-portfolios without having a holistic approach.

Borrowing for a rainy day: emergency loans in Bangladesh

Gregory Lane's picture

Blog post by a student on the job market.

Weather shocks are a constant and growing threat to much of the world’s rural population whose livelihoods depend on agriculture (Dercon, 2002). The cost of being exposed to these shocks is high: households sell productive assets or reduce spending on essential goods and services that can have substantial negative long-run consequences on household wellbeing. Moreover, households often adopt agricultural production processes that are less risky but also less productive in order to limit their exposure to these types of shocks (Janzen and Carter, 2018). Unfortunately, it has proved challenging to develop financial tools that reduce exposure this risk. Traditional insurance is often absent in developing countries because of moral hazard and adverse selection. Furthermore, weather-index insurance, which was designed to help farmers increase their resilience to extreme weather events, has suffered from low demand (Cole and Xiong, 2017).

Who’s afraid of big bad firms?

Asli Demirgüç-Kunt's picture

Superstar firms have been in the minds of world’s leading bankers and economists lately. Policymakers are concerned that America’s leading firms such as the FAANG stocks — Facebook, Apple, Amazon, Netflix and Google — are having adverse results on the rest of us and making economic policy less predictable. Why is this? Many of the companies have improved the lives of people across the world with highly desirable and useful products. These superstar firms have also done very well for many of their stakeholders and investors. The numbers are staggering. These five tech companies together account for roughly half of the gains achieved by the Standard & Poor’s 500 stock index in 2018. And in recent weeks, Apple became the world's first trillion-dollar corporation, with Amazon not far behind. While the superstar firms have made life easier for many consumers, it's hard for economists not to wonder whether the effects of their stratospheric success are entirely benign.

Can bank capital substitute for supervision and oversight?

Asli Demirgüç-Kunt's picture

Since its inception, bank capital regulation has been a topic of heated discussion and debate. At the international level, the Basel Committee on Banking Supervision (BCBS) has emerged as a global standard setter for regulation of banks. Starting with the first Basel accord in 1988, common capital targets were established to strengthen banks’ capital cushions and to ensure a level playing field at the international level.  These target capital ratios were designed to be the same across countries, without taking into consideration variations in local market conditions.

Ten Years after Lehman: Where are we now?

Asli Demirgüç-Kunt's picture

The tenth anniversary of the collapse of Lehman Brothers is a good opportunity for us all to reflect on the global financial crisis and the lessons we have learned from it. By now, there is widespread agreement that the crisis was caused by excessive risk-taking by financial institutions. There were increases in leverage and risk-taking, which took the form of excessive reliance on wholesale funding, lower lending standards, inaccurate credit ratings, and complex structured instruments. But why did it happen? How could such a crisis originate in the United States, home to arguably the most sophisticated financial system in the world? At the time, my colleagues and I argued incentive conflicts were at the heart of the crisis and identified reforms that would improve incentives by increasing transparency and accountability in the financial industry as well as government. After all, if large, politically powerful institutions regularly expect to be bailed out if they get into trouble, it is understandable that their risk appetite will be much higher than what is socially optimal.

Sowing the seeds for rural finance: The impact of support services for credit unions in Mexico

Miriam Bruhn's picture

Low and volatile agricultural incomes, poor connectivity, low population density and limited information are just a few reasons that have kept commercial banks away of rural areas in developing countries, where nonbank financial institutions (such as MFIs, cooperatives, or credit unions) have played an important role.

However, these rural institutions tend to be small and often suffer from bad risk management, poor governance, and weak technical and managerial capacity. These constraints are in turn passed on to the borrowers in the form of higher interest rates and credit rationing. The lack of human and organizational capital among lenders is a type of market failure where public interventions may be both effective and market friendly (Besley, 1994).

Solving Africa’s currency illiquidity problem

David Bee's picture

Some 41 currencies serve the African continent. Many of these are characterised by their illiquid and rarely traded status on the global financial market, as well as their volatility. So for those wishing to do business with Africa, these currencies — as difficult and expensive to source — can pose a real problem.

From the Namibian dollar to the Seychellois rupee, it is vital that organisations are able to source emerging market currencies reliably, on time, and at competitive prices. Yet such necessities often elude those trading with Africa, who view currency concerns as one of the biggest barriers to the development of Africa as an emerging — and therefore high growth — opportunity for international investors.

Benchmarking costs of financial intermediation around the world

Pietro Calice's picture
Bank financial intermediation plays a critical role in sustainable and inclusive growth. There is a considerable body of evidence showing that the extent to which an economy is making use of banking intermediation is not only associated with economic growth (Figure 1) and broader access to financial services (Figure 2) but it is a causal factor in explaining overall economic performance (see, for example, Levine, 2005), poverty reduction (e.g., Beck et al., 2007) and reduced inequality (e.g., Demirgüç-Kunt and Levine, 2009).

Moving from financial access to health

Tilman Ehrbeck's picture

Over the past decade, the push for financial inclusion has united governments, companies, technology entrepreneurs, and nonprofit organizations in dozens of countries on every continent — and with remarkable success. In 2011, only 51 percent of the world’s adults had a formal bank account. By 2017, as the World Bank recently reported in its new Global Findex data, we’ve reached 69 percent — that is 1.2 billion more people who are now connected to the modern economy.

As more people in emerging markets gain access to the formal financial system — fueled by the increased penetration of the mobile phone and associated digital financial services — the pace of financial inclusion is accelerating. At this rate, we're on track to reach universal financial access by 2020, a goal set by the World Bank, which is an important success milestone.  Access to basic financial services, such as a bank account, credit, and insurance, is a crucial step in improving people's social and economic outlook. 

To Cap or not to cap? What does Kenya’s experience tell us about the impact of interest rate caps on the financial sector?

Bilal Zia's picture

Interest rate caps can have far-reaching consequences on the composition and maturity of commercial bank loans and deposits. From both a policy and research standpoint, it is important to understand the mechanisms behind such impacts and the channels through which they affect various players in the financial sector.

While cross-country evidence suggests that interest rate caps can reduce credit availability and increase costs for low-income borrowers1, rigorous micro-evidence on the channels of impact within an economy is missing.

In a new working paper that uses bank-level panel data from Kenya, Mehnaz Safavian and I carefully examine the impact of the recently imposed interest rate caps on the country’s formal financial sector.2

In September 2016, the Kenyan Parliament passed a bill that effectively imposed a cap on interest rates charged on loans and a corresponding floor on the interest rates offered for deposit accounts by commercial banks. This new legislation was in response to the public view that lending rates in Kenya were too high, and that banks were engaging in predatory lending behavior. The interest rate caps were therefore intended to alleviate the repayment burden on borrowers and improve financial inclusion as more individuals and firms would be able to borrow at the lower repayment rates.

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