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Mr. John C Caparusso, Ms. Yingyuan Chen, Mr. Peter Dattels, Rohit Goel, and Paul Hiebert
The Global Financial Crisis unleashed changes in the operating and regulatory environments for large international banks. This paper proposes a novel taxonomy to identify and track business model evolution for the 30 Global Systemically Important Banks (G-SIBs). Drawing from banks’ reporting, it identifies strategies along four dimensions –consolidated lines of business and geographic orientation, and the funding models and legal entity structures of international operations. G-SIBs have adjusted their business models, especially by reducing market intensity. While G-SIBs have maintained international orientation, pressures on funding models and entity structures could affect the efficiency of capital flows through the bank channel.
International Monetary Fund. Asia and Pacific Dept
KEY ISSUES Context: The authorities continue to make progress on their far-reaching political and economic reform program. Key economic reform priorities are being realized. However, macroeconomic and financial risks are building, and capacity constraints are slowing institutional reform. Constitutional amendments are being considered ahead of the 2015 elections, and peace negotiations are continuing despite religious and ethnic tensions. Macroeconomic situation and outlook: Growth is accelerating, with average growth projected around 8¼ percent in the next few years, and inflation should remain broadly stable. After depreciating in 2013, the exchange rate has stabilized. The external current account has widened despite improved export performance but rising capital account inflows should enable Central Bank of Myanmar (CBM)’s international reserves to grow rapidly from their current low levels. Monetary aggregates are growing at double-digit rates. The underlying fiscal deficit in 2013/14 is estimated at 3 percent of GDP and is forecast to widen to around 5½ percent of GDP in 2014/15, but should decline below 5 percent of GDP in the medium term. However, off budget operations could increase the deficit. Risks also arise from capacity constraints and thin fiscal and external buffers. Medium- and long-term prospects: Economic prospects remain strong. Myanmar’s long-run growth potential is estimated at around 7 percent, in line with peer countries’ experience, but sound institutional and policy frameworks need to be built to realize this. Key policy recommendations: Macroeconomic policy challenges are likely to intensify in the short term. Monetary policy tools need to be more aggressively deployed, and mechanisms established to transfer public sector foreign exchange earnings automatically to the CBM. The regulatory framework for the banking sector needs to be urgently upgraded and supervision strengthened, particularly as foreign banks will soon enter. Tax policy and administration should aim at simplifying the system and preparing for the introduction of a value-added tax (VAT). Technical assistance (TA): Capacity building will be crucial to achieve policy objectives. The IMF continues to provide intensive TA in key areas, including in a wide range of CBM operations, tax policy and administration, public financial management and statistics.
Mr. Eugenio M Cerutti and Mr. Stijn Claessens
International banks greatly reduced their direct cross-border and local affiliates’ lending as the global financial crisis strained balance sheets, lowered borrower demand, and changed government policies. Using bilateral, lender-borrower countrydata and controlling for credit demand, we show that reductions largely varied in line with markets’ prior assessments of banks’ vulnerabilities, with banks’ financial statement variables and lender-borrower country characteristics playing minor roles. We find evidence that moving resources within banking groups became more restricted as drivers of reductions in direct cross-border loans differ from those for local affiliates’ lending, especially for impaired banking systems. Home bias induced by government interventions, however, affected both equally.
Mr. Serkan Arslanalp and Mr. Takahiro Tsuda
This paper proposes an approach to track US$1 trillion of emerging market government debt held by foreign investors in local and hard currency, based on a similar approach that was used for advanced economies (Arslanalp and Tsuda, 2012). The estimates are constructed on a quarterly basis from 2004 to mid-2013 and are available along with the paper in an online dataset. We estimate that about half a trillion dollars of foreign flows went into emerging market government debt during 2010–12, mostly coming from foreign asset managers. Foreign central bank holdings have risen as well, but remain concentrated in a few countries: Brazil, China, Indonesia, Poland, Malaysia, Mexico, and South Africa. We also find that foreign investor flows to emerging markets were less differentiated during 2010–12 against the background of near-zero interest rates in advanced economies. The paper extends some of the indicators proposed in our earlier paper to show how the investor base data can be used to assess countries’ sensitivity to external funding shocks and to track foreign investors’ exposures to different markets within a global benchmark portfolio.
Inessa Love and Rima Turk-Ariss
This paper investigates macro-financial linkages in Egypt using two complementary methods, assessing the interaction between different macroeconomic aggregates and loan portfolio quality in a multivariate framework as well as through a panel vector autoregressive method that controls for bank-level characteristics. Using a panel of banks over 1993-2010, the authors find that a positive shock to capital inflows and growth in gross domestic product improves banks’ loan portfolio quality, and that the effect is fairly similar in magnitude using the multivariate and panel vector autoregressive frameworks. In contrast, higher lending rates may lead to adverse selection problems and hence to a drop in portfolio quality. The paper also reports that a larger market share of foreign banks in the industry improves loan quality.
Laura Jaramillo and Ms. Yuanyan S Zhang
Experience from the global financial crisis suggests that countries’ borrowing costs are not solely determined by macro and fiscal fundamentals. Factors such as ownership structures of government securities, among others, also play a significant role. This paper investigates the effect of “real money investors”—domestic nonbanks and national and foreign central banks—on bond yields for a sample of 45 advanced and emerging market economies. The results show that, while bond yields rise with the debt to GDP ratio, this increase is partly offset if this debt falls in the hands of real money investors. Nonetheless, for some countries there is the risk that such ownership structure could change over the long run, which would impose upward pressure on borrowing costs, especially where fiscal positions are weak.
International Monetary Fund. Research Dept.
The Research Summaries in the March 2013 Research Bulletin discuss "Trade Finance and Its Role in the Great Trade Collapse" (JaeBin Ahn) and "Sovereign Debt: How to Track Who Is Buying and Selling It" (Serkan Arslanalp and Takahiro Tsuda). The Q&A looks at "Seven Questions on the Implications of Global Supply Chains for Real Effective Exchange Rates" (Rudolfs Bems). Readers can also find in this issue a listing of recent IMF Working Papers, Staff Discussion Notes, and Recommended Readings from IMF Publications. The Bulletin also includes a call for papers for a research conference and information on free access to the IMF Economic Review in April.