The crisis is Cyprus is still unfolding and the final resolution might still have some way to go, but the events in Nicosia and Brussels already offer some first lessons. And these lessons look certainly familiar to those who have studied previous crises. Bets are that Cyprus will not be the Troika’s last patient, with one South European finance minister already dreading the moment where he might be in a situation like his Cypriot colleague. Even more important, thus to analyze the on-going Cyprus crisis resolution for insights into where the resolution of the Eurozone crisis might be headed and what needs to be done.
The Cypriot banking system is insolvent and desperately in need of a bailout. Like Ireland, this island banking system has expanded rapidly over the years and currently has assets equal to almost 7 times its GDP, making the system too big to fail, but also "too big to save." Funding needed to recapitalize the banks is currently estimated to be around 17B euros (almost 100 percent of Cypriot GDP) making it impossible for Cyprus to resolve its crisis alone. A 10B euro rescue package was recently negotiated, but the bailout package proposed by the Troika — made up of the IMF, the EU and the ECB — still leaves Cypriots to come up with a sizable sum. The question is what to do.
The recent bailout plan proposed by the government (yet rejected by the Cypriot parliament) sparked significant controversy globally because it required a depositor levy to "bail in" all depositors to help pay for the bailout. On the one hand, the proposal is seen as violating the deposit guarantee and risk leading to bank runs elsewhere in the Euro Area and beyond. On the other hand, the Cypriot government felt the need to turn to depositors because a full bailout is out of the question given their debt burden will already reach unsustainable limits even with the partial bailout; most of their sovereign debt is under English law and cannot be restructured; their banks have few bonds to be written down; and about half of their depositors are rich Russian depositors attracted by their favorable tax system.
In the wake of the Great Recession there is a general consensus that monetary easing is key to stimulating investment and to strengthening economic recovery. However, there is a widespread concern that monetary stimulus is not reaching all markets evenly. For example, the International Monetary Fund (IMF, 2012) argues that monetary easing is allowing large corporations to access capital at record low rates, while small ﬁrms are struggling to obtain bank loans. Along the same lines, the president of the Federal Reserve Bank of New York suggests that the recent purchases of mortgage backed securities by the Federal Reserve were not effective in lowering primary mortgage rates, in part, because banks increased their margins.
Motivated by such concerns, in this paper I tackle the idea that bank competition affects the transmission of monetary policy across markets. In particular, I analyze the speed and completeness of the pass-through of the monetary policy rate to bank lending rates, and provide evidence on the importance of bank competition to explain heterogeneity in the way banks react to monetary policy impulses, using a unique transaction-level data set that includes all corporate loans of every commercial bank in Mexico from 2005 to 2010. For this purpose, I develop a simple model of the banking ﬁrm and test its implications using dynamic panel data methods.
Reforms to make it easier to register a business are the most common type of reform tracked by Doing Business, with over 75 percent of countries adopting at least one reform in this area over the past decade. One of the most popular types of reforms is to set up "one-stop shop" service points by integrating different registration steps with different levels of government into a single streamlined process, lowering the time and/or cost needed to register a business.
A number of studies, all from Latin America, have examined the impact of one-stop shops on firm registration, exploiting cross-time and cross-municipality variation in the implementation of these reforms to conduct difference-in-difference analysis. Bruhn (2011) uses labor market survey data to show that a reform in Mexico, which was implemented in some of the most populous and economically developed municipalities, increased the number of registered businesses by about 5 percent. Kaplan, Piedra, and Seira (2011) find that the same reform increased the number of new firm registrations with the Mexican Social Security Institute (IMSS) by 5 percent, using administrative data. For Columbia, Cárdenas and Rozo (2009) use administrative data from Chambers from Commerce in six major cities to show that a one-stop shop also led to a 5 percent increase in businesses registrations.
The recent financial crisis shocked the world. Aftershocks are still reverberating. The future of the Eurozone remains clouded. Much ink has been spilled about the causes of the crisis. Extraordinary measures have been taken to stimulate economies and rescue banks. Thousands of pages have been filled with new regulations. But will all the efforts bring us back to normal?
The crisis itself was a surprise for most. Equally surprising could be the long-term consequences. Rather than returning to "normal" we may see lasting shifts in the nature of financial systems. Two scenarios — "Repression" and "Turbulence" try to explore the new normal for financial institutions over the next 30 years. My paper written under the auspices of the Frankfurt School of Finance and Management in Germany explores the matter. The first part of the paper reviews relevant historical data and arguments about key drivers for the future such as financial regulation, prospects for growth and demographics. Illustrative numbers about long-term economic growth are derived from long-term projections by the OECD.
Extreme levels of household debt are common across the developing world. This is especially true in rural economies, where households face significant income volatility, but lack access to basic financial tools — such as insurance or futures contracts — that could reduce vulnerability to recurring income shocks.
In India, where over-indebtedness among rural households has been an important issue for decades, the government resorted to an unusually bold policy response. Prompted by a highly visible increase in farmer suicides, most notably in the Vidarbha region of Maharashtra, and a wave of defaults among microfinance borrowers, the Government of India embarked on what was perhaps the largest household level debt relief program in history. Announced in then finance minister Pranab Mukherjee’s budget speech on February 28, 2008 India’s Agricultural Debt Waiver and Debt Relief Program for Small and Marginal Farmers, cancelled the outstanding debts of 45 million rural households across the country, amounting to approximately 1.7% of India’s GDP.
Those who live in fragile and conflict-affected states face limitations that most of us simply cannot comprehend. Not only do the larger cycles of conflict and insecurity often lie beyond the control of individual adults, but the weak institutions that characterize these economies also severely restrict the opportunities for adults to manage their risks and improve their own lives. Amartya Sen has written that the central aspect of well-being is 'functioning,' defined as the freedom of choice and control over one's life. For adults living in fragile and conflict-affected states, the inability to smooth consumption and make investments through formal savings and credit systems is one of many restrictions on their 'functioning'.
Just 15 percent of adults in these economies have an account at a formal financial institution, compared to 24 percent, on average, in low-income countries and 43 percent in the rest of the developing world. This is the cruel paradox of financial inclusion in fragile and conflict-affected states: it is in precisely these countries that having a safe place to save or a reliable method to receive remittances is most important, yet access to and usage of basic financial services remains incredibly low.
Standard microeconomic theory establishes profit maximization as the ultimate goal of all enterprises. The entrepreneur’s motive for starting a business is not considered as a variable that could affect that goal. However, enterprises are not all the same. Across different countries, many entrepreneurs report non-pecuniary benefits as the primary reason for starting their business—and Mexico is not an exception. Those benefits include “flexibility” and “independence.” For other entrepreneurs, starting a business was a second option, only pursued after being laid off. These motives are especially common for microenterprises, which represent the large majority of businesses in Mexico.
In this study we shed light on how the motives for starting a business help explain differences in expectations and performance of firms. Different expectations mean different appetites for financing. A significant number of microenterprises’ owners in Mexico claim they do not need external financing. Moreover, most microentrepreneurs do not perceive the lack of financing as an obstacle for their businesses. Many of these businesses have little desire to grow or innovate, if any.
Estimates from the Finscope surveys suggest that in Africa, the proportion of the population without access to formal financial services ranges from 44 percent in South Africa to 92 percent in Mozambique (see Honohan and King 2012). Nigeria, the most populous country in Africa, lies at the higher end of this scale with 79 percent, approximately four-fifths of the adult population, estimated to be ‘unbanked’.
Despite economic theory and an increasing body of empirical research suggesting that access to savings, payment, and credit services facilitates consumption smoothing, helps insure against risk, and allows investment in education and other forms of capital, little is known about the relative importance of different barriers to financial services. Disentangling the roles played by demand constraints, such as income insufficiency, poor education, informality and financial illiteracy, and supply constraints, such as distance and high cost, is a crucial first step for attempts to design effective policies to broaden the reach of formal financial services.
The Global Financial Crisis of 2007 to 2009 has spurred renewed widespread debates on the “bright” and “dark” sides of financial innovation. The traditional innovation-growth view posits that financial innovations help reduce agency costs, facilitate risk sharing, complete the market, and ultimately improve allocative efficiency and economic growth. The innovation-fragility view, by contrast, has identified financial innovations as the root cause of the recent Global Financial Crisis, by leading to an unprecedented credit expansion fueling a boom-bust cycle in housing prices, by engineering securities perceived to be safe but exposed to neglected risks, and by helping banks and investment banks design structured products to exploit investors’ misunderstandings of financial markets and exploit regulatory arbitrage possibilities. Paul Volcker, former chairman of the Federal Reserve, claims that he can find very little evidence that the financial innovations in recent years have done anything to boost the economy.