Back Matter

Back Matter

International Monetary Fund. European Dept.
Published Date:
November 2007
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    Note: The main author of this chapter is Man-Keung Tang. The underpinning analytical work is presented in Tang (2007).

    For further details see International Monetary Fund (2007a).

    “How Do Financial Systems Affect Economic Cycles?” Chapter 4 in IMF (2006b).

    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).

    See International Monetary Fund (2006b).

    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.

    See Decressin, Faruqee, and Fonteyne (2007).

    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.

    La Porta and others (1997; 1998).

    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).


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