Showing papers by "James R. Barth published in 2007"

Financial restructuring and reform in post-WTO China

Abstract: Since 1979, China has been in the midst of an on-going process of liberalization of financial services, which has been accelerated under its WTO obligations. Such liberalization increases the vulnerability of China to financial crises, with domestic and international implications. In order to reduce its vulnerability, China is seeking to develop a robust financial system by restructuring its financial regulatory and institutional structure in accordance with international standards. This process requires structural choices to be made in respect of financial services liberalization commitments and international financial standards. These choices will have a significant impact upon the development of China's financial system. The reform of China's financial system raises many challenges. At the international level, there is at present no explicit linkage between the required legal infrastructure that must be in place for the development of a robust financial system and financial liberalization under the WTO. At the domestic level, weaknesses remain, which are likely to be brought to the surface by financial liberalization resulting from WTO accession and implementation. China's challenge is to strike an appropriate balance between a robust financial system and WTO compliance. Measures taken in this connection will also be indicative of potential disputes that may arise with other WTO members, including Hong Kong and Taiwan. In December 2006, China's two protective measures of geographical limitation and client limitation will be eliminated. There will be few market access limitations for foreign investors in banking, except capital requirements. In this context, it is interesting to know how Chinese financial regulators will deal with the liberalization issue arising from the WTO, and this is the focus of this authoritative book. This examination of China's financial reform under the WTO is meaningful for other developing and developed countries, as well as for China. This book addresses the on-going process of financial restructuring and reform in post-WTO China from a legal perspective. Chapter 1 provides an overview of the impact of the WTO on China's financial markets and financial law systems. Chapter 2 discusses reform of banking law and regulation in post-WTO China. Chapter 3 addresses the role of the central bank in China's financial system, focusing on issues of independence and accountability of the People's Banking of China (PBOC), China's central bank. Chapter 4 analyses China's compliance with WTO obligations in the area of banking. Chapter 5 discusses the role of asset management companies (AMCs) in China's on-going banking restructuring and liberalization. Chapter 6 analyses the development of securities markets in China, the challenges being faced and the impact of the WTO. Chapter 7 describes insurance and its development in China, focusing on the role of the WTO in liberalization. A new topic in China, i.e., financial conglomerates, is discussed in chapter 8, building upon the discussions in the previous chapters. Chapter 9 in turn studies the issue of financial institution insolvency and restructuring - as noted in previous chapters, key issues in China. Chapter 10 discusses the double impact of the WTO and one of China's regional trade agreements, CEPA, on China's banking law.

A Cross-country Analysis of Bank Performance: The Role of External Governance

Abstract: Recent corporate scandals, together with the effects of globalization, have led to an increasing interest in corporate governance issues. Little attention has been paid, however, to international laws and recommendations dealing with corporate governance in banking from a global perspective. This impressive international set of expert contributors – academics, practitioners and regulators – remedies the lack of attention by examining the various issues and concerns of this important topic.

China's Changing Financial System: Can It Catch Up With, or Even Drive Growth

Abstract: Throughout the past three decades of fast growth, China has undergone tremendous structural changes in its economy. There has been significant and continuing industrialization, urbanization and integration into the world economy. The financial system has also undergone major changes, with the People's Bank of China (PBOC) ending its monopoly of the banking sector and being recast as the

Corruption in bank lending to firms : do competition and information sharing matter?

Abstract: Extending the important study by Beck, Demirguc-Kunt and Levine (2007), we examine the effects of borrower and lender competition and information sharing via credit registries/bureaus on corruption in bank lending. Using the unique dataset of the World Business Environment Survey (WBES) compiled by the World Bank, and information on credit registries/bureaus and bank regulation assembled by other scholars, we find (1) strong evidence that banking competition reduces lending corruption and (2) the first and robust evidence that information sharing among banks is conducive in reducing corruption in bank lending. We also find that government- and foreign-owned firms as well as exporting firms tend to be subject to less lending corruption, objective courts and better law enforcement tend to reduce lending corruption, private and foreign ownership of the banking industry are associated with more integrity in lending, and that more private monitoring of banks helps to curtail lending corruption. These findings are consistent with the predictions of a Nash bargaining model.

WTO Commitments vs. Reported Practices on Foreign Bank Entry and Regulation: A Cross-Country Analysis

Abstract: The General Agreement on Trade in Services (GATS) is an important new element in the international framework that affects the regulation of the financial sector of every World Trade Organization (WTO) Member and all potential new Members. However, except for a limited number of country-specific case studies, no attempt has been made to compare WTO commitments on opening the domestic banking sector to foreign banks with actual regulatory practice in a systematic manner on a cross-country basis. Nor has much attention been devoted to assessing the degree to which WTO Members may impose greater restrictions on foreign banking operations relative to domestic banks once foreign entry has occurred. This paper addresses both of these important empirical questions, by drawing on a new and comprehensive dataset of the WTO commitments made by 123 Member countries, paired with systematic World Bank data on the regulations imposed on foreign banks by those countries. The main objective is to assess the overall extent to which countries open their borders to foreign banks less (or more) than they are legally obliged to do based upon their WTO commitments. Our results show substantial divergences between commitments and reported practices across a range of foreign bank entry requirements and permissible banking activities. We deepen and broaden this analysis by constructing a comprehensive index of market openness taking into account additional entry and operations requirements and restrictions. We compare the variant of the index constructed using the WTO commitments data with the variant constructed with parallel components in the World Bank 'reported practices' data. Using this methodology, we find a substantial proportion of countries whose reported banking practices are more restrictive than their WTO commitments indicate they should be. However, we also find a significantly large group of countries whose banking markets in practice are more open than their WTO commitments oblige them to be. Our comprehensive index is also used to determine the degree to which banking regulation disadvantages foreign banks relative to domestic banks in each country; and, again, both the WTO commitments data and the World Bank reported practices data yield separate variants. Overall we find: 1) developed countries are more open to foreign entry than are developing countries; but 2) developed countries as a group are somewhat less open than their WTO commitments suggest they should be, whereas developing countries are in practice significantly more open than their WTO commitments oblige them to be; and 3) for foreign and domestic banks operating within each set of countries, foreign banks are, on average, at somewhat less of a regulations-related disadvantage relative to domestic banks than is the case for developed countries on average.

A Cross-Country Analysis of Bank Performance: The Role of External Governance

Abstract: It is by now commonly understood that healthy banking systems require not only more insightful regulation and supervision but a new emphasis on market discipline. In this regard a rapidly growing body of research has focused on both measures internal to the firm the bank – “corporate governance” – and other measures likely to enhance the ability of the market to work in a manner that promotes safe and sound banking practices. The current paper examines the issue of “external governance” – i.e., measures that complement good corporate governance by enhancing bank information accuracy, transparency, and accountability. In particular, using a large and new cross-country database, we develop measures of the efficacy of accounting standards, the strength of external auditing, financial statement transparency, and the efficacy of external ratings and credit monitoring activities. These measures address the issue of the extent to which those parties disclosing information to the public are held accountable for its accuracy. We incorporate these variables, as well as an index of external governance combining these components, into equations modeling various measures of bank performance, including profitability, net interest margin, and bank efficiency. We find substantial evidence that the individual aspects of external governance, as well as the composite index, have positive and statistically significant effects on bank profitability and net interest margins, and negative and statistically significant impacts on bank efficiency. Our findings suggest that subsequent research investigating cross-country differences in bank performance should directly take account of external governance factors. In addition, and more importantly, we provide empirical evidence supporting Pillar 3 of Basel II. In light of the fact that many policy decisions have been made, or are in the process of being made, based on these lessons about new ways to enhance banking safety and soundness, especially via strengthening market discipline, one might expect such empirical support to provide a measure of comfort within the banking and regulatory communities.

China's Changing Financial System: Can It Catch Up With, or Even Drive Growth

Abstract: Throughout the past three decades of fast growth, China has undergone tremendous structural changes in its economy. There has been significant and continuing industrialization, urbanization and integration into the world economy. The financial system has also undergone major changes, with the People's Bank of China (PBOC) ending its monopoly of the banking sector and being recast as the nation's central bank in the late 1970s and early 1980s. The purpose of this paper is to examine in some detail China's changing financial system so as to assess whether it can catch up with, or even drive economic growth.

A Theoretical and Empirical Assessment of Bank Risk-Shifting Behavior

Abstract: Banks are important for mobilizing savings and then channeling those funds to productive investment projects. While providing these and other services that contribute to economic growth and development, banks take on various types of risks with the expectation that the return they receive will compensate for the risks. This paper theoretically models and empirically tests the extent to which information asymmetry between bank owners and depositors induces risk-shifting behavior that allows for higher bank net interest margins. The empirical results support the theoretical hypothesis that the greater the degree of information asymmetry the higher net interest margins base upon a sample of 3,115 banks in 98 countries.

What Do We Know about the Performance and Risk of Hedge Funds

Abstract: Introduction A front-page story in September of 2006 was the unr aveling of the hedge fund Amarath Advisors. Its assets fell by a reported 65 percent in a month and 55 percent, or $6 billion, for the year. The back-page story was that financial market s barely reacted to this shocking development. This was in sharp contrast to the near -collapse of Long-Term Capital Management (LTCM) in 1998. Despite the lack of a broader marke t eaction, the rapid and huge losses suffered by Amarath raise serious issues about the performance and risk of hedge funds more generally. The purpose of our paper is to use a comprehensive data source on hedge funds to examine the performance and risk of these funds. Mu tual funds, unlike hedge funds, are widely available to the public and therefore must be regis t red with the Securities and Exchange Commission. They are, moreover, limited in the stra tegies they can employ. Hedge funds, on the other hand, are set up as limited partnerships and ge erally not constrained by regulatory limitations on their investment strategies. Further mo e, although the word “hedge” typically refers to the hedging of the value of assets throug h the use of derivative instruments or the simultaneous use of long positions and short sales, mo t hedge funds employ strategies that do not involve hedging as more commonly understood. In eed, many funds do just the opposite, which explains the collapse of Amarath and LTCM. Th e paper will therefore examine some of the different strategies employed by hedge funds, a ssess whether there are any differences among them in terms of performance and risk, and examine some of the factors that help explain why some funds remain in the industry and others exit. Several previous studies have addressed the implica tions of hedge funds for financial stability. But the results of these efforts thus fa r h ve been less successful than one might hope. For instance, in a recent study that attempts to qu antify the potential impact of hedge funds on systemic risk, Chan, Getmansky, Haas and Lo (2005, p. 97) state that “... we cannot determine the magnitude of current systemic risk with any deg re of accuracy.” Similarly, Garbaravicius and Dierick (2005, p.55) conclude that “It is very difficult to provide any conclusive evidence on the impact of hedge funds on financial markets....” M oreover, as regards regulation, Timothy Geithner (2006, p.8), President of the Federal Rese rv Bank of New York, states that “Clearly, capital supervision and market discipline remain th e key tools for limiting systemic risk. The emergence of new market participants such as levera ge institutions does not change that.” In addition, Danielsson, Taylor and Zigrand (2005, pp. 26-27) while arguing that there is a “... need for a credible resolution mechanism to deal with th e default of systemically important hedge funds ... the procedural issues and related incentive effects [to do so] are complex ...[and] ...require further consideration in order to provide th correct incentives for the various parties.” Given the conclusions of these impressive efforts o f well-recognized experts, we have decided not to try to expand and improve upon this line of nquiry in the present paper.