Showing papers by "Luc Laeven published in 2003"

What drives bank competition? some international evidence

Abstract: Using bank-level data, the authors apply the Panzar and Rosse (1987) methodology to estimate the extent to which changes in input prices are reflected in revenues earned by specific banks in 50 countries' banking systems. They then relate this competitiveness measure to indicators of countries' banking system structures and regulatory regimes. The authors find systems with greater foreign bank entry and fewer entry and activity restrictions to be more competitive. They find no evidence that the competitiveness measure negatively relates to banking system concentration. Their findings confirm that contestability determines effective competition, especially by allowing (foreign) bank entry and reducing activity restrictions on banks.

Does Financial Liberalization Reduce Financing Constraints

Abstract: We use panel data on a large number of firms in 13 developing countries to find out whether financial liberalization relaxes financing constraints of firms. We find that liberalization affects small and large firms differently. Small firms are financially constrained before the start of the liberalization process, but become less so after liberalization. Financing constraints of large firms, however, are low before financial liberalization, but become higher as financial liberalization proceeds. We hypothesize that financial liberalization has adverse effects on the financing constraints of large firms, because these firms had better access to preferential directed credit during the period before financial liberalization. JEL Classification Codes: E22, E44, G31, O16

Does Judicial Efficiency Lower the Cost of Credit

Abstract: The authors investigate the effect of judicial efficiency on banks' lending spreads for a large cross section of countries. They measure bank interest rate spreads for 106 countries at an aggregate level, and for 32 countries at the level of individual banks. The authors find that-after controlling for a number of other country characteristics-judicial efficiency, in addition to inflation, is the main driver of interest rate spreads across countries. This suggests that in addition to improving the overall macroeconomic climate in a country, judicial reforms, through a better enforcement of legal contracts, are critical to lowering the cost of financial intermediation for households and firms.

What Drives Bank Competition? Some International Evidence

Abstract: Using bank-level data, Claessens and Laeven apply the Panzar and Rosse (1987) methodology to estimate the extent to which changes in input prices are reflected in revenues earned by specific banks in 50 countries' banking systems. They then relate this competitiveness measure to indicators of countries' banking system structures and regulatory regimes. The authors find systems with greater foreign bank entry and fewer entry and activity restrictions to be more competitive. They find no evidence that the competitiveness measure negatively relates to banking system concentration. Their findings confirm that contestability determines effective competition, especially by allowing (foreign) bank entry and reducing activity restrictions on banks. This paper - a product of the Financial Sector Operations and Policy Department - is part of a larger effort in the department to study competition in the financial sector.

Governance and Bank Valuation

Abstract: Which public policies and ownership structures enhance the governance of banks? Is the governance of banks different from other corporations? This paper constructs a new database on the ownership of banks internationally and then assesses the ramifications of ownership, shareholder protection laws, and supervisory/regulatory policies on bank valuations. Except in a few countries with very strong shareholder protection laws, banks are not widely held, but rather families or the State tend to control banks. We find that (i) larger cash-flow rights by the controlling owner boosts valuations, (ii) stronger shareholder protection laws increase valuations, and (iii) greater cash-flow rights mitigate the adverse effects of weak shareholder protection laws on bank valuations. These results are consistent with the views that expropriation of minority shareholders is important internationally, that laws can restrain this expropriation, and concentrated cash-flow rights represent an important mechanism for governing banks. Finally, the evidence does not support the view that empowering official supervisory and regulatory agencies will increase the market valuation of banks.

Regulations, Market Structure, Institutions, and the Cost of Financial Intermediation

Abstract: This paper examines the impact of bank regulations, market structure, and national institutions on bank net interest margins and overhead costs using data on over 1,400 banks across 72 countries while controlling for bank-specific characteristics. The data indicate that tighter regulations on bank entry and bank activities boost the cost of financial intermediation. Inflation also exerts a robust, positive impact on bank margins and overhead costs. While concentration is positively associated with net interest margins, this relationship breaks down when controlling for regulatory impediments to competition and inflation. Furthermore, bank regulations become insignificant when controlling for national indicators of economic freedom or property rights protection, while these institutional indicators robustly explain cross-bank net interest margins and overhead expenditures. Thus, bank regulations cannot be viewed in isolation; they reflect broad, national approaches to private property and competition.

The impact of bank regulations, concentration, and institutions on bank margins

Abstract: This paper examines the impact of bank regulations, concentration, inflation, and national institutions on bank net interest margins using data from over 1,400 banks across 72 countries while controlling for bank-specific characteristics. The data indicate that tighter regulations on bank entry and bank activities boost net interest margins. Inflation also exerts a robust, positive impact on bank margins. While concentration is positively associated with net interest margins, this relationship breaks down when controlling for regulatory impediments to competition and inflation. Furthermore, bank regulations become insignificant when controlling for national indicators of economic freedom or property rights protection, while these institutional indicators robustly explain cross-bank net interest margins. So, bank regulations cannot be viewed in isolation. They reflect broad, national approaches to private property and competition.

The Growing Importance of Networks in Finance and Its Effects on Competition

Abstract: Financial services industries have been changing rapidly, fostered by globalization and technological advances, including the emergence of e-finance. Changes have made financial services less special, making policies to preserve the franchise value of banks less necessary, and have increased the importance of networks in the production and distribution of financial services. As a consequence, competition policy for financial services is both more feasible and necessary today, and needs to resemble that of other network industries. Institutional and functional approaches to competition need to be complemented with a production approach, that is, the various inputs required for the production and distribution of financial services need to be available to those interested in using them, be fairly priced and be efficiently provided. * Claessens is at the University of Amsterdam and CEPR. Dobos is at the University of Toulouse. Klingebiel and Laeven are at the World Bank. Opinions do not represent necessarily official World Bank policy.

Resolving Systemic Crises: Policies and Institutions

Abstract: We analyze the role of policy and institutions in resolving a systemic crisis for a broad sample of countries. As others have documented before, we find that extensive liquidity support, (unlimited) government guarantees on financial institutions’ liabilities and forbearance from prudential regulations add to the fiscal costs of resolution. Although these accommodative policies are costly, they do not accelerate the recovery from a crisis. Better institutions—lower corruption, greater law and order, better legal system, and a better bureaucracy—do, however, lower costs and accelerate economic recovery. We find these results using both country and industry level data and to be relatively robust to estimation techniques and samples. They suggest that countries best use strict policies to resolve a crisis and focus on structural reforms, which, as has been shown elsewhere, will also help avoid future systemic crises.

A Taxonomy of Financial Crisis Restructuring Mechanisms: Cross- Country Experience and Policy Implications

Abstract: The goals of financial restructuring are to reestablish the creditor-debtor relationships upon which the economy depends for an efficient allocation of capital, and to accomplish that objective at minimal cost. Costs include direct costs to taxpayers of financial assistance and the indirect costs to the economy that result from misallocations of capital and incentive problems created by the restructuring. We review cases in which countries employed alternative mechanisms to restructure their financial and corporate sectors. Countries typically apply a combination of tools, including decentralized, market-based mechanisms and government-managed programs. Marketbased strategies seek to strengthen the capital base of financial institutions and/or borrowers to enable them to renegotiate debt and resume new credit supply. Government-led restructuring strategies often include the establishment of an entity to which non-performing loans are transferred or the government’s sale of financial institutions, sometimes to foreign entrants. Market-based mechanisms can, in principle, resolve coordination problems countries face in the wake of massive debtor and creditor insolvency with acceptably low direct and indirect costs, particularly when those mechanisms are effective in achieving the desirable objective of selectivity (focusing taxpayer resources on borrowers and banks that are worth assisting). But these mechanisms depend for their success on an efficient judicial system, a credible supervisory framework and authority with sufficient enforcement capacity, and a lack of corruption in implementation. Government-managed programs may not seem to depend as much on efficient legal and supervisory institutions for their success, but in fact these approaches, in particular, the transfer of assets to government-owned asset management companies, also depend on effective legal, regulatory, and political institutions for their success. Asset management companies (AMCs) may not achieve their objectives of resolving the overhang of corporate debt at reasonable cost when legal and political institutions are weak. Further, a lack of attention to incentive problems when designing specific rules governing financial assistance can aggravate moral hazard problems, unnecessarily raising the costs of resolution. These results suggest that policymakers in emerging market economies with weak institutions should not expect to achieve the same level of success in financial restructuring as other countries, and that they should design resolution mechanisms accordingly. Despite the theoretical attraction of some complex marketbased mechanisms, and of AMCs, simpler resolution mechanisms that afford quick resolution of outstanding debts, that improve financial system competitiveness (e.g., via encouraging foreign entry), and that offer little discretion to government officials are most effective.

International Portfolio Diversification Benefits: Cross-Country Evidence

Abstract: We investigate how the benefits of international portfolio diversification differ across countries from the perspective of a local investor. We find that the benefits of investing abroad are largest for investors in developing countries, including when controlling for currency effects. Most of the benefits are obtained from investing outside the region of the home country. These global diversification benefits remain large when controlling for short-sales constraints in developing stock markets. In addition, the gains from international portfolio diversification appear to be largest for countries with high country risk. Other differences across countries, such as size of the stock market, size of the banking sector, and trade openness do not explain differences in the gains from international portfolio diversification beyond this first-order effect of the level of country risk. In addition to this cross-sectional evidence, we also provide evidence that diversification benefits vary over time as country risk changes. Given the decrease in country risk for most countries in our sample, this implies that diversification benefits have decreased over the period 1985 to 2002.

Does Judicial Efficiency Lower the Cost of Credit

Abstract: Laeven and Majnoni investigate the effect of judicial efficiency on banks' lending spreads for a large cross section of countries. They measure bank interest rate spreads for 106 countries at an aggregate level, and for 32 countries at the level of individual banks. The authors find that - after controlling for a number of other country characteristics - judicial efficiency, in addition to inflation, is the main driver of interest rate spreads across countries. This suggests that in addition to improving the overall macroeconomic climate in a country, judicial reforms, through a better enforcement of legal contracts, are critical to lowering the cost of financial intermediation for households and firms. This paper - a product of the Financial Sector Operations and Policy Department - is part of a larger effort in the department to study the determinants of access to finance and the cost of credit.

Does judicial efficiency lower the cost of credit

Abstract: The authors investigate the effect of judicial efficiency on banks'lending spreads for a large cross section of countries. They measure bank interest rate spreads for 106 countries at an aggregate level, and for 32 countries at the level of individual banks. The authors find that-after controlling for a number of other country characteristics-judicial efficiency, in addition to inflation, is the main driver of interest rate spreads across countries. This suggests that in addition to improving the overall macroeconomic climate in a country, judicial reforms, through a better enforcement of legal contracts, are critical to lowering the cost of financial intermediation for households and firms.