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Journal Article

Comparing financial systems.

01 Jan 2000-Kyklos-Vol. 53, Iss: 3, pp 387-388
About: This article is published in Kyklos.The article was published on 2000-01-01 and is currently open access. It has received 603 citations till now.
Citations
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Journal ArticleDOI
TL;DR: In this article, the authors argue that the legal approach is a more fruitful way to understand corporate governance and its reform than the conventional distinction between bank-centered and market-centered financial systems, and discuss the possible origins of these differences, summarize their consequences, and assess potential strategies of corporate governance reform.

6,387 citations

Journal ArticleDOI
TL;DR: Li et al. as discussed by the authors examined three sectors of the economy: the State Sector (state-owned firms), the Listed Sector (publicly listed firms), and the Private Sector (all other firms with various types of private and local government ownership).
Abstract: China is an important counterexample to the findings in the law, institutions, finance, and growth literature: neither its legal nor financial system is well developed by existing standards, yet it has one of the fastest growing economies. We examine 3 sectors of the economy: the State Sector (state-owned firms), the Listed Sector (publicly listed firms), and the Private Sector (all other firms with various types of private and local government ownership). The law-finance-growth nexus established by existing literature applies to the State and Listed Sectors: with poor legal protections of minority and outside investors, external markets are weak, and the growth of these firms is slow or negative. However, with arguably poorer applicable legal and financial mechanisms, the Private Sector grows much faster than the State and Listed Sectors, and provides most of the economy's growth. This suggests that there exist effective alternative financing channels and governance mechanisms, such as those based on reputation and relationships, to support this growth.

2,829 citations


Cites background or result from "Comparing financial systems."

  • ..., McMillan, 1995, 1997; Allen and Gale, 2000b). What we see from the success of Private Sector firms in WenZhou and other surveyed firms suggests that it is only those firms that have the strongest comparative advantage in an industry (of the area) that survive and thrive. DLLS (2002) examine entry barriers across 85 countries including China. Entry barriers are a relevant factor for the growth of China’s Private Sector, as lower entry barriers foster competition. DLLS find that countries with heavier (lighter) regulation of entry have higher government corruption (more democratic and limited governments) and larger unofficial economies. With much lower barriers to entry compared to other countries with similar (low) per capita GDP, China is once again an ‘‘outlier’’ in the DLLS sample. The outlier status is even stronger considering that China is one of the least democratic countries, and such countries tend to have high barriers to entry. Based on our survey evidence, we conclude that there exist non-standard methods to remove entry barriers in China: First, 16 out of the 17 firms applied for a license (required) before the business started, with 50% of them indicating that it takes two weeks to one month to go through the procedure and 37.5% say it takes one to two months. The main problem for the application for a license seems to be dealing with government bureaucracy. To ease this problem, most of the firms’ founders/executives ask the friends of government officials to negotiate on their behalf, or the firms can offer profit sharing to government officials. But these methods are consistent with our results that alternative mechanisms based on reputation and relationships provide the most important support for the growth of the Private Sector. There are other effective corporate governance mechanisms. First, Burkart et al. (2003) link the degree of separation of ownership and control to different legal environments, and show that family-run firms will emerge as the dominant form of ownership structure in countries with weak minority shareholder protection, whereas...

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  • ..., Allen and Gale, 2000a). It is often argued that one of the reasons the U.S. has been so successful in developing new industries in recent years is the existence of a strong venture capital sector (e.g., Kortum and Lerner, 2000). Consistent with our previous findings, China’s venture capital industry, since its inception in the 1980s, is underdeveloped and its role in supporting the growth of young firms is very limited. Moreover, based on interviews conducted with 36 venture capitalists in 24 venture companies, Bruton and Ahlstrom (2002) find that the limited formal rules and regulations are often ineffective, while alternative mechanisms based on reputation and relationship are the norm in all stages and phases of the industry....

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  • ...Second, Allen and Gale (2000a) show that if cooperation among different suppliers of inputs is necessary and all suppliers benefit from the firm doing well, then a good equilibrium with no external governance is possible, as internal, mutual monitoring can ensure the optimal outcome....

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  • ...The second most important mechanism is competition in product and input markets, which has worked well in both developed and developing countries (e.g., McMillan, 1995, 1997; Allen and Gale, 2000b)....

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  • ...Second, Allen and Gale (2000a) show that if cooperation among different suppliers of inputs is necessary and all suppliers benefit from the firm doing well, then a good equilibrium with no external governance is possible, as internal, mutual monitoring can ensure the optimal outcome. We have shown trade credits are an important form of financing for firms during their growth period. Third, the common goal of sharing high prospective profits can align interests of local and foreign investors with entrepreneurs and managers to overcome numerous obstacles and achieve their common goal. Under this common goal in a multiperiod setting, implicit contractual agreements and reputation can act as enforcement mechanisms to ensure that all parties fulfill their roles to make the firm successful. Profit sharing also makes it incentive compatible for officials at various levels to support the growth of the firm. Finally, there is a strand of literature studying transitional economies, such as Russia, China, Vietnam, and Eastern European countries, from Socialist systems to market systems. It is important to point out why China differs from other transitional economies. First, with the exception of Russia, China’s economy is much larger and more diversified than other transitional economies. With a small and homogenous economy, a country can adjust its legal and financial systems to the strengths of its economy much easier than a large country can. The recent economic struggle in Russia illustrates this point (e.g., Shleifer and Treisman, 2000). The success of China’s Private Sector demonstrates that alternative mechanisms can work wonders even in large and diversified economies. Second, it is probably easier for other countries to adopt drastic reform measures in the short run. China, under the influence of Confucius’ views, is different in that people hold the belief that fundamental changes in society should be gradual and should be fully implemented only after they are proven correct. This view, however, does not prevent regional experiments conducted at a smaller scale. Accordingly, China adopted a gradual, ‘‘dual track’’ path in its economic reform, where the continued enforcement of the existing planning system goes alongside with the fast-paced development of financial markets, as compared to the ‘‘big bang’’ approach taken by some other countries (e.g., Lau et al., 2000). Third, the role played by the government during the reform process is very different in China than in most other transition economies, and in particular, Russia (e.g., Blanchard and Shleifer, 2001). In a broader context, LLSV (1999) find that governments in countries with French or socialist origins have lower quality (in terms of supporting economic growth) than those with English common laws and richer countries....

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Journal ArticleDOI
TL;DR: The authors show that existing theoretical analyses of this topic are fragile, since there exist fundamental risk-incentive mechanisms that operate in exactly the opposite direction, causing banks to become more risky as their markets become more concentrated.
Abstract: There is a large body of literature that concludes that—when confronted with increased competition—banks rationally choose more risky portfolios. We argue that this literature has had a significant influence on regulators and central bankers. We review the empirical literature and conclude that the evidence is best described as “mixed.” We then show that existing theoretical analyses of this topic are fragile, since there exist fundamental risk-incentive mechanisms that operate in exactly the opposite direction, causing banks to become more risky as their markets become more concentrated. These mechanisms should be essential ingredients of models of bank competition.

1,836 citations

Journal ArticleDOI
TL;DR: In this paper, the impact of national bank concentration, bank regulations, and national institutions on the likelihood of a country suffering a systemic banking crisis was studied using data on 69 countries from 1980 to 1997.
Abstract: Motivated by public policy debates about bank consolidation and conflicting theoretical predictions about the relationship between bank concentration, bank competition and banking system fragility, this paper studies the impact of national bank concentration, bank regulations, and national institutions on the likelihood of a country suffering a systemic banking crisis. Using data on 69 countries from 1980 to 1997, we find that crises are less likely in economies with more concentrated banking systems even after controlling for differences in commercial bank regulatory policies, national institutions affecting competition, macroeconomic conditions, and shocks to the economy. Furthermore, the data indicate that regulatory policies and institutions that thwart competition are associated with greater banking system fragility.

1,292 citations

Journal ArticleDOI
TL;DR: In this article, a multi-dimensional empirical model was proposed to study how financial contracts respond to the legal and institutional environment, showing that loans with strong creditor protection have concentrated ownership, long maturity and low interest rates.
Abstract: Legal and institutional differences shape the ownership and terms of bank loans across the world. With strong creditor protection, we show that loans have concentrated ownership, long maturity and low interest rates. The impact of creditor rights on loans also depends on borrower characteristics such as the size and tangibility of assets. Foreign banks appear especially sensitive to the legal and institutional environment. Their ownership declines relative to domestic banks as creditor protection falls. Our multi-dimensional empirical model paints a more complete picture of how financial contracts respond to the legal and institutional environment than existing studies.

898 citations

References
More filters
Journal ArticleDOI
TL;DR: In this article, the authors argue that the legal approach is a more fruitful way to understand corporate governance and its reform than the conventional distinction between bank-centered and market-centered financial systems, and discuss the possible origins of these differences, summarize their consequences, and assess potential strategies of corporate governance reform.

6,387 citations

Journal ArticleDOI
TL;DR: The authors show that existing theoretical analyses of this topic are fragile, since there exist fundamental risk-incentive mechanisms that operate in exactly the opposite direction, causing banks to become more risky as their markets become more concentrated.
Abstract: There is a large body of literature that concludes that—when confronted with increased competition—banks rationally choose more risky portfolios. We argue that this literature has had a significant influence on regulators and central bankers. We review the empirical literature and conclude that the evidence is best described as “mixed.” We then show that existing theoretical analyses of this topic are fragile, since there exist fundamental risk-incentive mechanisms that operate in exactly the opposite direction, causing banks to become more risky as their markets become more concentrated. These mechanisms should be essential ingredients of models of bank competition.

1,836 citations

Journal ArticleDOI
TL;DR: In this paper, the impact of national bank concentration, bank regulations, and national institutions on the likelihood of a country suffering a systemic banking crisis was studied using data on 69 countries from 1980 to 1997.
Abstract: Motivated by public policy debates about bank consolidation and conflicting theoretical predictions about the relationship between bank concentration, bank competition and banking system fragility, this paper studies the impact of national bank concentration, bank regulations, and national institutions on the likelihood of a country suffering a systemic banking crisis. Using data on 69 countries from 1980 to 1997, we find that crises are less likely in economies with more concentrated banking systems even after controlling for differences in commercial bank regulatory policies, national institutions affecting competition, macroeconomic conditions, and shocks to the economy. Furthermore, the data indicate that regulatory policies and institutions that thwart competition are associated with greater banking system fragility.

1,292 citations

Posted Content
TL;DR: The authors used a variety of models to address the question of what are the efficient levels of competition and financial stability, and found that different models provide different answers, and that sometimes competition increases stability, while in a second best world, concentration may be socially preferable to perfect competition.
Abstract: Competition policy in the banking sector is complicated by the necessity of maintaining financial stability. Greater competition may be good for (static) efficiency, but bad for financial stability. From the point of view of welfare economics, the relevant question is: What are the efficient levels of competition and financial stability? We use a variety of models to address this question and find that different models provide different answers. The relationship between competition and stability is complex: sometimes competition increases stability. In addition, in a second-best world, concentration may be socially preferable to perfect competition and perfect stability may be socially undesirable.

834 citations

Posted Content
TL;DR: In this paper, the authors argue that commercial banks pose unique corporate governance problems for managers and regulators, as well as for claimants on the banks' cash flows, such as investors and depositors.
Abstract: The study argues that commercial banks pose unique corporate governance problems for managers and regulators, as well as for claimants on the banks' cash flows, such as investors and depositors The authors support the general principle that fiduciary duties should be owed exclusively to shareholders However, in the special case of banks, they contend that the scope of the fiduciary duties and obligations of officers and directors should be broadened to include creditors In particular, the authors call on bank directors to take solvency risk explicitly and systematically into account when making decisions or else face personal liability for failure to do so

802 citations