Addressing high levels of non-performing loans (NPLs) is key to preserving financial stability and an important element of an integrated development agenda. High levels of NPLs lock in capital that could support fresh lending, and they create a negative macro-financial feedback loop, as debt overhang depresses borrowers’ investment and consumption decisions. High NPLs have particularly adverse implications in emerging market and developing economies (EMDEs), which lack fully developed capital markets and where credit is provided mostly by banks. Hence expanding the role of debt servicing companies and a secondary market for distressed debt is a constructive strategy: it should be a priority in most EMDEs.
Since more than 50% of small and medium-sized businesses (SMEs) worldwide lack adequate access to credit, the international community is proposing reforms that will help countries strengthen their financial infrastructure and make it easier for SMEs to borrow funds needed to operate and expand.
In the history of famous feuds, there are the Hatfields and the McCoys, the Montagues and the Capulets and, sometimes it seems, lawyers and economists.
As a lawyer, I often find myself in heated debates with my economist friends and colleagues. Where they use data, we use words; where they have faith in rational actors, we know that humans are, sadly, often deeply irrational; and where they want to connect different data points to illustrate a trend, we want to highlight the infinite nuance between those data points that insists against a simple narrative.
Yet, despite our seemingly fundamental differences, we do seem to be coming together around the notion that law does matter for finance. Specifically, that certain kinds of laws (those around creditor rights and insolvency) matter for certain kinds of finance (debt).
In a new paper, published by the European Bank for Reconstruction and Development, my colleague Antonia Menezes and I partnered with two Oxford University scholars, John Armour and Kristin van Zwieten, to show how financial infrastructure laws influence debt finance.
In the interest of full disclosure, I will tell you that all four of us are lawyers. However, John and Kristin are leading academics at the intersection of economics and law in Oxford’s Law and Finance program, and both have advanced degrees in economics. They can talk the talk and walk the walk!
Decentralization in many countries has given subnational governments certain spending responsibilities, revenue-raising authority, and the capacity to incur debt. Furthermore, rapid urbanization in developing countries is requiring large-scale infrastructure financing to help absorb influxes of rural populations. Not surprisingly, the subnational debt market in some developing countries has been going through a notable transformation.