Macroprudential policies-caps on loan to value ratios, limits on credit growth and other balance-sheet restrictions, (countercyclical) capital and reserve requirements and surcharges, and Pigouvian ...levies-have become part of the policy paradigm in emerging markets and developed countries alike. But knowledge of these tools is still limited. Macroprudential policies ought to be motivated by market failures and externalities, but these can be hard to identify. They may also interact with various other policies, such as monetary and microprudential, raising coordination issues. Countries, especially emerging markets, have used these tools, and analyses suggest that some of those tools reduce procyclicality and crisis risks. Yet, much remains to be studied, including the costs of such tools, as they may adversely affect resource allocations; how best to adapt these tools to a country's circumstances; and preferred institutional designs, including how to address political economy risks. As such, policy makers should move carefully in adopting these tools.
•Macroprudential policies are increasing being used.•Emerging economies use them most, especially foreign exchange related ones.•Advanced countries use borrower-based policies more.•Usage is ...generally associated with lower growth in credit, notably household credit.•Effects are less in more developed and open economies.•While macroprudential policies can reduce financial cycles, they work less well in busts.
Using a recent IMF survey and expanding on previous studies, we document the use of macroprudential policies for 119 countries over the 2000–2013 period, covering many instruments. Emerging economies use macroprudential policies most frequently; especially foreign exchange related ones while advanced countries use borrower-based policies more. Usage is generally associated with lower growth in credit, notably in household credit. Effects are less in financially more developed and open economies, however, and usage comes with greater cross-border borrowing, suggesting some avoidance. And while macroprudential policies can help manage financial cycles, they work less well in busts.
Countries' gross capital inflows are not equally affected by changes in global conditions. Analyzing 21 advanced countries (ACs) and 33 emerging markets (EMs) between 2001 and 2015, we confirm that ...co-movements in capital inflows are concentrated in bank, portfolio bond, and portfolio equity flows to EMs. However, changes in global factors do not affect all EMs equally, even for the same type of flow. Investigating the characteristics of these sensitivities, we find that EMs relying more on global mutual funds are more sensitive in their gross equity and bond inflows. Recipient market liquidity and inclusion in global market indices also increase sensitivities, but we find little robust evidence that institutional and macroeconomic fundamentals dampen sensitivities.
Foreign Banks: Trends and Impact CLAESSENS, STIJN; VAN HOREN, NEELTJE
Journal of money, credit and banking,
February 2014, Volume:
46, Issue:
s1
Journal Article
Peer reviewed
Over the past two decades, foreign banks have become much more important in domestic financial intermediation, heightening the need to understand their behavior. We introduce a new, comprehensive ...database, made publicly available, on bank ownership (including the home country of foreign banks) for 5,324 banks in 137 countries over the period 1995-2009. We document large increases in foreign bank presence in many countries, but with substantial heterogeneity in terms of host and banks' home countries, bilateral investment patterns, and bank characteristics. In terms of impact, we document that the relation between private credit and foreign bank presence importantly depends on host country and banks' characteristics. Specifically, foreign banks only seem to have a negative impact on credit in low-income countries, in countries where they have a limited market share, where enforcing contracts is costly and where credit information is limited available, and when they come from distant home countries. This shows that accounting for heterogeneity, including bilateral ownership, is crucial to better understand the implications of foreign bank ownership.
Using novel indicators of political connections constructed from campaign contribution data, we show that Brazilian firms that provided contributions to (elected) federal deputies experienced higher ...stock returns than firms that did not around the 1998 and 2002 elections. This suggests that contributions help shape policy on a firm-specific basis. Using a firm fixed effects framework to mitigate the risk that unobserved firm characteristics distort the results, we find that contributing firms substantially increased their bank financing relative to a control group after each election, indicating that access to bank finance is an important channel through which political connections operate. We estimate the economic costs of this rent seeking over the two election cycles to be at least 0.2% of gross domestic product per annum.
This paper reviews recent research on corporate governance, with a special focus on emerging markets. It finds that better corporate governance benefit firms through greater access to financing, ...lower cost of capital, better performance, and more favorable treatment of all stakeholders. Numerous studies show these channels to operate at the level of firms, sectors and countries—with causality increasingly often clearly identified. Evidence also shows that voluntary and market corporate governance mechanisms have less effect when a country's governance system is weak. Importantly, how corporate governance regimes change over time and how this impacts firms are receiving more attention recently. Less evidence is available on the direct links between corporate governance and social and environmental performance. The paper concludes by identifying issues requiring further study, including the special corporate governance issues of banks, and family-owned and state-owned firms, and the nature and determinants of public and private enforcement.
Interest rates in many advanced economies have been low for almost a decade now and are often expected to remain so. This creates challenges for banks. Using a sample of 3385 banks from 47 countries ...from 2005 to 2013, we find a one percentage point interest rate drop implies an 8 basis points lower net interest margin, with this effect greater (20 basis points) at low rates. Low rates also adversely affect bank profitability, but with more variation. And for each additional year of “low-for-long”, margins and profitability fall by another 9 and 6 basis points, respectively.
We quantify the importance of a Global Financial Cycle (GFCy) for capital flows. We use capital flow data disaggregated by direction and type between 1990Q1 and 2015Q4 for 85 countries, and ...conventional techniques, models and metrics. Since the GFCy is unobservable, we use two methods to represent it: directly observable variables in center economies often linked to it, such as the VIX, and indirect manifestations. proxied by common dynamic factors extracted from actual capital flows. Our evidence seems mostly inconsistent with a significant and conspicuous GFCy for capital flows; both methods combined rarely explain more than a quarter of the variation for most types of capital flows, in most countries, for most of the time. Succinctly, most variation in capital flows does not seem to be the result of common shocks nor stem from observables in a central country like the USA.
This paper analyzes the interactions between business and financial cycles using an extensive database covering 44 countries for the period 1960:1–2010:4. Our analysis shows that there are strong ...linkages between the different phases of business and financial cycles. In particular, recessions associated with financial disruptions, notably house and equity price busts, tend to be longer and deeper than other recessions. Conversely, while recoveries following asset price busts tend to be weaker, recoveries associated with rapid growth in credit and house prices are often stronger. These findings emphasize the importance of financial market developments for the real economy.
In countries with more secure property rights, firms might allocate resources better and consequentially grow faster as the returns on different types of assets are more protected against ...competitors' actions. Using data on sectoral value added for a large number of countries, we find evidence consistent with better property rights leading to higher growth through improved asset allocation. Quantitatively, the growth effect is as large as that of improved access to financing due to greater financial development. Our results are robust using various samples and specifications, including controlling for growth opportunities.
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