The U.S. and Western Europe suffered their worst banking crisis since the 1930s with global wholesale liquidity evaporating and Western banks suffering important losses. The crisis followed a period in which the globalization of the financial system dramatically deepened. European banks, in particular, extended their operations in the international wholesale market and increased their presence in many countries through the establishment of a foreign branch or subsidiary. Did this increased dependency on international wholesale funding and the growth of foreign bank presence intensify the international transmission of financial shocks?
How effectively does the commercial banking system respond to idiosyncratic shocks to the income and consumption of the households in the rural sector of an economy, and does it make extra credit available at a reasonable cost? This is an enormously important question. Farming operations in emerging economies are still heavily dependent on rainfall. Intermittent failure of monsoons and other weather-related vicissitudes often upset the normal income and consumption patterns of many rural households. However, a survey of the literature on rural financial markets finds few studies on the responsiveness of the financial intermediation system to credit demand shocks.
By contrast, local bilateral credit and insurance arrangements with landlords, moneylenders, family and friends, or group-based mutual savings and insurance arrangements such as rotating savings and credit associations (ROSCAs) have received much attention in the literature (see, for example, Coate and Ravallion 1993; La Ferrara 2003; Townsend 1995; Genicot and Ray 2002). However, the risks to income and consumption that rural households face are typically correlated, as they arise from common external shocks such as floods and famines, and the pool of savings is usually limited. As a result, local markets fail to offer adequate diversification opportunities and funds at a reasonable cost. Consequently, individuals and households in the rural economy are left facing considerable residual risk, with no option but to adopt costly and inefficient strategies to smooth income or consumption. A number of such strategies have been discussed in the existing literature, including scattering plots of cultivable land (McCloskey 1976; Townsend 1993) and opting for a more diversified mix of crops and nonfarm production activities at the price of a lower average return, adjustment of inter-temporal labor supply in response to shocks (Kochar 1999), labor bonding (Srinivasan 1989; Genicot 2002), selling investment assets to smooth consumption (Rosenzweig and Wolpin 1993) and several other options. Not surprisingly, the welfare implications of the strategies are typically very negative.
To reduce asymmetric information problems associated with extending credit and increase the chances of loan repayment, banks typically require collateral from their borrowers.
Movable assets often account for most of the capital stock of private firms and comprise an especially large share for micro, small, and medium-size enterprises. Hence, movable assets are the main type of collateral that firms, especially those in developing countries, can pledge to obtain bank financing. While a sound legal and regulatory framework is essential to allow movable assets to be used as collateral, without a well-functioning registry for movable assets, even the best secured transactions laws could be ineffective or even useless.
Given the importance of collateral registries for moveable assets, 18 countries have established such registries in the past decade. However, to my knowledge there is no systematic empirical evidence on whether such reforms have been effective in fulfilling their primary goal: improving firms’ access to bank finance.
- access to finance