Note: The main author of this chapter is Man-Keung Tang. The underpinning analytical work is presented in Tang (2007).
In other words, the number of times savings are intermediated (“change hands”) on their way to the end borrowers has increased, and the possibility of slicing and bundling risks in ways that better cater to different intermediaries and investors has expanded.
OMX Nordic Exchange, which consolidates exchanges in Denmark, Sweden, Finland, and Iceland, and Virt-X, which offers trading in pan-European blue-chip stocks, are two other notable examples.
There are many other suggested benefits of more sophisticated financial systems. Competitive financial markets encourage innovations (e.g., Holmstrom and Tirole, 1993) and facilitate aggregation of diffuse information (e.g., Boot and Thakor, 1997). The smaller vested interest the creditor has in the borrower and the borrowing firm enhances the latter’s corporate governance (e.g., Dewatripont and Tirole, 1994) and encourages competition in product markets (e.g., Cestone and White, 2003).
A more sophisticated financial system here refers to one that has a higher score on the financial index developed in the September 2006 WEO.
To explicitly address possible endogeneity, rather than studying the simple correlation between finance and macroeconomic performance, the analysis exploits cross-country industry-level data to examine the mechanisms underlying finance’s contribution to the economy. For details of the analysis, see Tang (2007).
Germany’s Landesbanken, for instance, significantly underperform their EU peers, and their high ratings, bolstered by the public sector ownership, give them an artificial advantage on the wholesale market over their privately owned counterparts (Brunner and others, 2004).
Europe’s covered bond market, though, is very well developed. However, as the underlying assets of covered bonds remain on banks’ balance sheets (and hence have to be supported by a corresponding amount of regulatory capital), securitization represents a more effective way for banks to raise funds and manage risks.
In particular, legal factors and concerns about reputational risks may force banks to reintegrate off-balance-sheet vehicles and fulfill contingent funding commitments.
The lack of transparency on the origination process may, in turn, encourage the originators to adopt a laxer underwriting standard.
For instance, there have been recent discussions on creating measures of valuation risks in the rating agencies’ assessments.
Note: The main authors of this chapter are Rudolfs Bems and Philip Schellekens. The analytical underpinnings of this chapter and the details of the simulations are presented in Bems and Schellekens (2007).
Financial deepening will be interpreted here narrowly as the expansion of credit to resident nonfinancial corporations and households.
Note: The main author of this chapter is Edda Zoli. The underpinning analytical work is presented in Zoli (2007).
The turnover ratio is defined as the value of trading relative to market capitalization.
Croatia, the Czech Republic, Hungary, Poland, and Slovenia.
Johnson, McMillan, and Woodruff (2002); and Acemoglu, Johnson, and Robinson (2004).
La Porta and others (1997; 1998); and Djankov, McLiesh, and Shleifer (2005).
For emerging Europe, explaining the development of segments of the financial sector other than bank credit is challenging. Econometric studies on the determinants of development of debt securities markets in the region are hampered by data limitations. For the equity market, while earlier empirical work underscored the role of the privatization process, single-digit inflation, rising income, shareholder protection, and institutional investor assets in fostering market capitalization during the 1990s, our recent study could not confirm these findings.
Major steps in this direction were taken with the Financial Services Action Plan (FSAP), the Lamfalussy process, and the Commission White Paper on Financial Services Policy. The FSAP was launched in 1999 with the objective of removing barriers to the cross-border flow of financial services and capital within the European Union. The Lamfalussy process was established in 2001 to facilitate the implementation of the FSAP regulatory framework. The Commission White Paper on Financial Services Policy sets the priorities for EU-level financial sector reforms over 2005–10 (Haas, 2007a).
For example, enforcing a debt contract costs on average 50 percent more in non-EU than in EU emerging economies. Furthermore, in several non-EU countries. firms tend to distrust courts (See EBRD–World Bank Business Environment and Enterprise Performance Survey, 2005; and Anderson and Gray, 2006).
International Monetary Fund and World Bank (2001).
References
Acemoglu, Daron, Simon Johnson, and James Robinson, 2004, “Institutions as the Fundamental Cause of Long-Run Growth,” NBER Working Paper No. 10481 (Cambridge, Massachusetts: National Bureau of Economic Research).
Anderson, J., and C. Gray, 2006, “Transforming Judicial Systems in Europe and Central Asia,” paper presented at World Bank ABCDE conference, St. Petersburg, Russia, January.
Arora, Vivek, and Athanasios Vamvakidis, 2005, “How Much Do Trading Partners Matter for Economic Growth?” IMF Staff Papers, Vol. 52, No. 1.
Arvai, Zsofia, and Geoffrey Heenan, 2005, “A Framework for Developing Secondary Markets for Government Securities” (unpublished; Washington: International Monetary Fund).
Baldwin, Robert E., 2003, “Openness and Growth: What’s the Empirical Relationship?” NBER Working Paper No. 9578 (Cambridge, Massachusetts: National Bureau of Economic Research).
Barth, James R., Gerald Caprio, Ross Levine, 2006, Rethinking Bank Regulation: Till Angels Govern (New York: Cambridge University Press).
Berglöf, Erik, and Patrick Bolton, 2002, “The Great Divide and Beyond: Financial Architecture in Transition,” Journal of Economic Perspectives, Vol. 16, No. 1, pp. 77–100.
Bems, R., and P. Schellekens, 2007, “Finance and Convergence: What’s Ahead For Emerging Europe?” IMF Working Paper 07/244 (Washington: International Monetary Fund).
Boot, Arnoud, and Anjan Thakor, 1997, “Financial System Architecture,” Review of Financial Studies, Vol. 10, No. 3, pp. 693–733.
Boyd, John H., Ross Levine, and Bruce D. Smith, 2001, “The Impact of Inflation on Financial Sector Performance,” Journal of Monetary Economics, Vol. 47 (April), pp. 221–48.
Brunner, Allan, Jörg Decressin, Daniel C. Hardy, and Beata Kudela, 2004, Germany’s Three-Pillar Banking System: Cross-Country Perspectives in Europe, IMF Occasional Paper No. 233 (Washington: International Monetary Fund).
Campello, Murillo, 2006, “Debt Financing: Does It Boost or Hurt Firm Performance in Product Markets?” Journal of Financial Economics, Vol. 82 (October), pp. 135–17.
Cestone, Giacinta and Lucy White, 2003, “Anticompetitive Financial Contracting: The Design of Financial Claims,” Journal of Finance, Vol. 58, No. 5, pp. 2109–42.
Choi, James J., David Laibson, Andrew Metrick, 2002, “How Does the Internet Affect Trading? Evidence from Investor Behavior in 401(k) Plans,” Journal of Financial Economics, Vol. 64 (June), pp. 397–421.
Cihák, Martin and Alexander Tieman, 2007, “Assessing Current Prudential Arrangements,” in Integrating Europe’s Financial Markets, ed. by Jörg Decressin, Hamid Faruqee, and Wim Fonteyne (Washington: International Monetary Fund).
Claessens, Stijn, Ruben Lee, Josef Zechner, 2003, The Future of Stock Exchanges in European Union Accession Countries (London: Corporation of London).
Csajbók, Attila, and Judit Neményi, 1998, “The Contribution of the Government Securities Market to the Development of Wider Securities Markets in Hungary,” in Capital Market Development in Transition Economies - Country Experiences and Policies for the Future (Paris: OECD).
Decressin, Jörg Hamid Faruqee, and Wim Fonteyne, eds., 2007, Integrating Europe’s Financial Markets (Washington: International Monetary Fund).
Demekas, Dimitri, 2007, “Are European Emerging Markets Different?” in Emerging Markets: Any Lessons for Southeastern Europe? Proceedings of OeNB Workshop No. 12 (Vienna, Öesterreichische Nationalbank).
De Nicolò, Gianni, 2007, “Financial Integration and Risk-Adjusted Growth Opportunities,” presented at the 10th Annual International Banking Conference on Globalization and Systemic Risk, Federal Reserve Bank of Chicago, September 27–29.
Dewatripont, M., and J. Tirole, 1994, “A Theory of Debt and Equity: Diversity of Securities and Manager-Shareholder Congruence,” Quarterly Journal of Economics, Vol. 109, No. 4, pp. 1027–54.
Djankov, Simeon, Caralee McLiesh, Andrei Shleifer, 2005, “Private Credit in 129 Countries,” NBER Working Paper No. 11078 (Cambridge, Massachusetts: National Bureau of Economic Research).
EBRD–World Bank Business Environment and Enterprise Performance Survey, 2005. Available via the Internet: http://www.ebrd.com/country/sector/econo/surveys/beeps.htm.
EFMA, Capgemini, and ING, 2005, World Retail Banking Report 2005.
Égert, Balazs, and Dubravko Mihaljek, 2007, “Determinants of House Price Dynamics in Central and Eastern Europe,” in Focus on European Economic Integration 1/07 (Vienna: Österreichische Nationalbank).
Eichengreen, Barry, 2007, The European Economy since 1945: Coordinated Capitalism and Beyond (Princeton, New Jersey: Princeton University Press).
European Bank for Reconstruction and Development, 2005, Transition Report 2005: Business in Transition (London).
Haas, François, 2007a, “Current State of Play,” in Integrating Europe’s Financial Markets, ed. by Jörg Decressin, Hamid Faruqee, and Wim Fonteyne (Washington: International Monetary Fund).
Haas, François, 2007b, “The Market in Financial Instruments Directive and the Transformation of Europe’s Capital Markets,” IMF Country Report No. 07/259 (Washington: International Monetary Fund).
Hilbers, P., I. Ötker-Robe, and C. Pazarbasioglu, 2007, “Analysis of and Policy Responses to Rapid Credit Growth,” in Rapid Credit Growth in Central and Eastern Europe: Endless Boom or Early Warning? ed. by Charles Enoch and Inci Ötker-Robe (New York: Palgrave Macmillan; and Washington: International Monetary Fund).
Holmstrom, Bengt, and Jean Tirole, 1993, “Market Liquidity and Performance Monitoring,” Journal of Political Economy, Vol. 101 (August), pp. 678–709.
Huybens, Elisabeth and Bruce D. Smith, 1999, “Inflation, Financial Markets, and Long-Run Real Activity,” Journal of Monetary Economics, Vol. 43 (April), pp. 283–315.
International Monetary Fund, 2006a, “Italy: 2006 Article IV Consultation—Staff Report,” IMF Country Report 07/64 (Washington).
International Monetary Fund, 2006b, World Economic Outlook, September (Washington).
International Monetary Fund, 2007a, Global Financial Stability Report, October (Washington).
International Monetary Fund, 2007b, “Italy—Selected Issues,” IMF Country Report 07/65 (Washington).
International Monetary Fund, 2007c, “Reaping the Benefits of Financial Globalization,” IMF Discussion Paper (Washington: International Monetary Fund). Available via the Internet: http://ww.imf.org/external/np/res/docs/2007/0607.htm.
International Monetary Fund, and World Bank, 2001, Developing Government Bond Markets: A Handbook (Washington: World Bank).
Iorgova, Silvia, and Li Lian Ong, 2007, “The Capital Market of Emerging Europe: Institutions, Instruments and Investors,” forthcoming IMF Working Paper (Washington: International Monetary Fund).
Ivaschenko, Iryna, 2007, “Financial Intermediation and Growth in Italy,” forthcoming IMF Working Paper (Washington: International Monetary Fund).
Johnson, Simon. John McMillan, and Christopher Woodruff, 2002, “Property Rights and Finance,” American Economic Review, Vol. 92 (December), pp. 1335–56.
Kiyotaki, N., and J. Moore, 1997, “Credit Cycles,” Journal of Political Economy, Vol. 105 (April), pp. 211–48.
Lane, Philip, and Gian Maria Milesi-Ferretti, forthcoming, “The External Wealth of Nations: Mark II,” Journal of International Economics.
LaPorta, R., F. Lopez-de-Silanes, A. Shleifer, and R. Vishny, 1997, “Legal Determinants of External Finance,” Journal of Finance, Vol. 52 (July), pp. 1131–50.
LaPorta, R., F. Lopez-de-Silanes, A. Shleifer, and R. Vishny, 1998, “Law and Finance,” Journal of Political Economy, Vol. 106 (December), pp. 1113–55.
McAndrews, James, and Chris Stefanadis, 2002, “The Consolidation of European Stock Exchanges,” Federal Reserve Bank of New York, Current Issues in Economics and Finance, Vol. 8, No. 6 (June), pp. 1–6.
Moore, D., and A. Vamvakidis, 2007, “Economic Growth in Croatia: Potential and Constraints,” IMF Working Paper 07/198 (Washington: International Monetary Fund).
Petersen, M., and R. Rajan, 2000, “Does Distance Still Matter? The Information Revolution in Small Business Lending,” NBER Working Paper No. 7685 (Cambridge, Massachusetts: National Bureau of Economic Research).
Schellekens, Philip, 2000, “Costly Collateral and the Public Supply of Liquidity,” IMF Working Paper 00/125 (Washington: International Monetary Fund).
Tang, Man-Keung, 2007, “Private-Sector Financial Liabilities in Advanced Economies: Is More Better?” IMF Working Paper 07/118 (Washington: International Monetary Fund).
Vamvakidis, Athanasios, 2007, “External Debt and Economic Reform: Does a Pain Reliever Delay the Necessary Treatment?” IMF Working Paper 07/50 (Washington: International Monetary Fund).
Zoli, Edda, 2007, “Financial Development in Emerging Europe: The Unfinished Agenda,” IMF Working Paper 07/245 (Washington: International Monetary Fund).