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Financial Sector

Insulating Foreign Bank Subsidiaries from Shocks to Their Parents

Maria Soledad Martinez Peria's picture

Since the late 1990s, the importance of multinational banks has grown dramatically.  Between 1999 and 2009 the average share of bank assets held by foreign banks in developing countries rose from 26 percent to 46 percent. The bulk of the pre-global crisis evidence analyzing the consequences of this significant transformation in bank ownership suggests that foreign bank participation brought many benefits to developing countries, especially in terms of bank competition and efficiency.

The recent global financial crisis, however, highlighted the role of multinational banks in the transmission of shocks across countries. Most of the research has focused on transmission through the lending channel – how foreign bank lending behaved during the crisis. A number of papers, including some before the recent global crisis, have documented that lending by foreign bank affiliates declines when parent banks’ financial conditions deteriorate.

Liquidity Glut, Infrastructure Finance Drought and Development Banks

Otaviano Canuto's picture

The world economy faces huge infrastructure financing needs that are not being matched on the supply side. Emerging market economies, in particular, have had to deal with international long-term private debt financing options that are less supportive of infrastructure finance.

Enlarging the Contracting Space: Collateral Menus, Access to Credit, and Economic Activity

Mauricio Larrain's picture

One of the main obstacles that firms in developing countries face is lack of access to credit. A key factor that restricts access is insufficient collateral. Interestingly, banks in less-developed countries usually lend only against real estate; they rarely lend against other assets such as machinery, equipment, or inventory. The problem is that assets such as machines and equipment often account for most of the capital stock of small and medium-size firms. In this context, these assets become “dead capital”: they lose their debt capacity and only serve as inputs in the firms’ production processes.

While it’s true that machines and equipment are less redeployable than real estate, banks in developed countries do lend against these types of assets. In a recent study with Murillo Campello, we argue that the root of the problem lies in weak collateral laws. The law makes a clear distinction between two types of assets: immovable assets (e.g., real estate) and movable assets (e.g., machinery and equipment). Developing countries have weak collateral laws regarding movable assets, which makes its very difficult to pledge these assets as collateral. This shrinks the contracting space, since the menu of collateral becomes smaller, which limits access to credit. Moreover, since movable assets lose debt capacity, firms under-invest in technologies intensive in movable assets.

Austerity vs. Fiscal Stimulus: A False Dilemma?

Augusto Lopez-Claros's picture

The 2008-2009 global financial crisis led to a number of large–scale government interventions across the world. These included massive provisions of liquidity, the takeover of weak financial institutions, the extension of deposit insurance schemes, purchases by the government of troubled assets, bank recapitalization and, of course, packages of fiscal stimulus, sometimes of a scale not seen since World War II. Even the IMF, the world’s traditional guardian of sound public finance, came out strongly in favor of fiscal loosening, arguing through its managing director that “if there has ever been a time in modern economic history when fiscal policy and a fiscal stimulus should be used, it's now” and that it should take place “everywhere where it's possible. Everywhere where you have some room concerning debt sustainability. Everywhere where inflation is low enough not to risk having some kind of return of inflation, this effort has to be made".

Vietnam’s long-term growth performance: A comparative perspective

Axel van Trotsenburg's picture


Vietnam has achieved remarkably high and inclusive GDP growth since the late 1980s. GDP growth per capita increased three-and-a-half-fold during 1991-2012, a performance surpassed only by China. The distribution of growth has been as remarkable as its pace: the bottom 40% of the population’s share in national income has remained virtually unchanged since the early 1990s, ensuring that the rapid income gains got translated into shared prosperity and significant poverty reduction.

GDP growth, however, has been operating on a lower trajectory since 2008. This has led to questions regarding the sustainability of the growth process, and, with it, Vietnam’s ability to bounce back to about 7-8% per capita growth. Analysts have voiced concerns over declining total factor productivity growth and growing reliance on capital accumulation. Moreover, a number of competitiveness issues routinely get raised by private investors, including: a widening skills gap, limited access to finance, relatively high trade and transport logistics costs, an overbearing presence of the SOEs, and heavy government bureaucracy that makes it difficult for businesses to operate in Vietnam.

Quote of the Week: Raghuram Rajan

Sina Odugbemi's picture

Central bankers have had enormous responsibilities thrust on them to compensate, essentially, for the failings of the political system. And my worry is we don’t have sufficient tools to do that, but we’re not willing to say it. And, as a result, we push as hard as we can on the existing tools, and they may create more risk in the system.” 

- Raghuram Rajan, Governor of the Reserve Bank of India since 4 September 2013. Prior to his post at the Reserve Bank of India, Rajan was chief economic adviser to India's Ministry of Finance in 2012 and chief economist at the International Monetary Fund from 2003 to 2007.
 

Re-thinking Economics Education: How New 'Core' Curriculum Hopes to Better Prepare Students

Miles McKenna's picture

Is it time for more pluralistic approaches to economic problems?Summer is almost over and the fall semester is about to begin for young economics students. But this semester could be the start of something much larger at University College London (UCL) and the University of Massachusetts in Boston.  
 
These two schools are among the first to pilot a fundamentally new approach to the way economics is taught in higher education. Others including the University of Sydney, Sciences Po (Paris), and the University of Chile will follow in early 2015.
 
This new approach is based on the CORE project of the Institute for New Economic Thinking (INET) at the Oxford Martin School, part of a global call for an overhaul of the economics curriculum commonly taught to undergraduates. True to its name, the CORE project has developed a new, interactive core curriculum—all delivered through an online virtual learning environment, and completely open to the public.
 

In Latin America, Hard Hats and Tools are no longer only for Men

Maria Margarita Nunez's picture

Women that have joined road maintenance has increased significantly.

While driving around rural areas of Puno in Peru, Caaguazú in Paraguay or Granada in Nicaragua, do not be surprised to see women lifting rocks from the roads and using shovels and picks alongside men.  In fact, in the past 15 years, the number of women that have joined organizations in charge of routine road maintenance in Latin America has increased significantly and with this their life conditions have improved dramatically.

The Things We Do: Saving for Change

Roxanne Bauer's picture

At the basis of communication and public policy are assumptions about human beings- their rationality or irrationality, their foibles, wants and preferences. A lot depends on whether these assumptions are correct. In this feature, we bring you fascinating examples of human behavior from across the globe.

Saving money is hard.  However, it is also considered to be necessary for making large purchases like a house or car, opening up a business, or planning for retirement. Saving can be particularly difficult for the poor who live day-by-day and do not have much disposable income.  In wealthier countries, financial institutions offer a variety of products to help their clients set aside savings, but in poorer countries, there are fewer savings options. Many poor people end up hiding cash, investing in assets such as livestock or land, or engaging in informal savings arrangements

Yet, for those who have even a little money to stow away, the benefits can be enormous. Massachusetts Institute of Technology (MIT) economists Abhijit Banerjee and Esther Duflo have found that even those who live on less than $1 per day have the ability save and often spend money on nonessential items such as alcohol, tobacco, and televisions.  Moreover, when poor people increase their earnings, they spend only two-thirds of their increased income on food.  These findings suggest that poor people do have funds to save.

But why is it so difficult for people of all income levels to save?

Quote of the Week: Zhang Lei

Sina Odugbemi's picture

"You need to have the ability to delay gratification. You have to focus and you have to have a clear mind.”

- Zhang Lei, Chairman and CEO of Hillhouse Capital Management, one of the largest equities investment firms in Asia, speaking on his longterm investment strategy.  Hillhouse, based in Beijing, typically invests in consumer, internet and media, medical treatment and healthcare, advanced manufacturing and commodity related sectors and manages $10 billion for leading endowments, sovereign funds, pensions and family offices.  Zhang also serves as a board member for several Asian companies, including Jingdong (formerly 360Buy), Blue Moon, Qunar and MNC/Global Mediacom. 
 


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