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Abstract:
Legal and accounting reform that strengthens creditor rights, contract enforcement, and accounting practices boosts financial development and accelerates economic growth.

Levine, Loayza, and Beck evaluate:

Whether the level of development of financial intermediaries exerts a casual influence on economic growth.

Whether cross-country differences in legal and accounting systems (such as creditor rights, contract enforcement, and accounting standards) explain differences in the level of financial development.

Using both traditional cross-section, instrumental-variable procedures and recent dynamic panel techniques, they find that development of financial intermediaries exerts a large causal impact on growth.

The data also show that cross-country differences in legal and accounting systems help determine differences in financial development.

Together, these findings suggest that legal and accounting reform that strengthens creditor rights, contract enforcement, and accounting practices boosts financial development and accelerates economic growth.

This paper - a product of Macroeconomics and Growth, Development Research Group - is part of a larger effort in the group to understand the links between the financial system and economic growth. Thorsten Beck may be contacted at tbeck@worldbank.org.

Abstract:
This paper evaluates (1) whether the exogenous component of financial intermediary development influences economic growth and (2) whether cross-country differences in legal and accounting systems (e.g., creditor rights, contract enforcement, and accounting standards) explain differences in the level of financial development. Using both traditional cross-section, instrumental variable procedures and recent dynamic panel techniques, we find that the exogenous component of financial intermediary development is positively associated with economic growth. Also, the data show that cross-country differences in legal and accounting systems help account for differences in financial development. Together, these findings suggest that legal and accounting reforms that strengthen creditor rights, contract enforcement, and accounting practices can boost development and accelerate economic growth.

Financial development, economic growth, legal system

Abstract:
A country's legal origin - whether British, French, German, or Scandinavian - helps explain the development of its financial institutions today. Legal systems differ in their ability to facilitate private exchanges and to adapt to support new financial and commercial transactions. A country cannot change its legal origin, but it can (with considerable effort) reform its judicial system by emphasizing the rights of outside investors, by providing more certain and efficient contract enforcement, and by creating a legal system that adapts more readily to changing economic conditions.

Beck, Demirguc-Kunt, and Levine assess three established theories about the historical determinants of financial development. They also propose an augmented version of one of these theories.

The law and finance view stresses that different legal traditions emphasize to differing degrees the rights of individual investors relative to the state, which has important ramifications for financial development.

The dynamic law and finance view augments the law and finance view, stressing that legal traditions also differ in their ability to adapt to changing conditions.

The politics and finance view rejects the central role of legal tradition, stressing instead that political factors shape financial development.

The endowment view argues that the mortality rates of European settlers as they colonized various parts of the globe influenced the institutions they initially created, which has had enduring effects on institutions today. When initial conditions produced an unfavorable environment for European settlers, colonialists tended to create institutions designed to extract resources expeditiously, not to foster long-run prosperity.

The authors' empirical results are most consistent with theories that stress the role of legal tradition. The results provide qualified support for the endowment view. The data are least consistent with theories that focus on specific characteristics of the political structure, although politics can obviously affect the financial sector.

In other words, legal origin - whether a country has a British, French, German, or Scandinavian legal heritage - helps explain the development of the country's financial institutions today, even after other factors are controlled for. Countries with a French legal tradition tend to have weaker financial institutions, while those with common law and German civil laws tend to have stronger financial institutions.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to understand the link between financial development and economic growth. The study was funded by the Bank's Research Support Budget under the research project "Financial Structure and Economic Development" (RPO 682-41). The authors may be contacted at tbeck@worldbank.org, ademirguckunt@worldbank.org, or rlevine@csom.umn.edu.

Abstract:
This new database of indicators of financial development and structure across countries and over time unites a range of indicators that measure the size, activity, and efficiency of financial intermediaries and markets.

Beck, Demirguc-Kunt, and Levine introduce a new database of indicators of financial development and structure across countries and over time.
This database is unique in that it unites a variety of indicators that measure the size, activity, and efficiency of financial intermediaries and markets.

It improves on previous efforts by presenting data on the public share of commercial banks, by introducing indicators of the size and activity of nonbank financial institutions, and by presenting measures of the size of bond and primary equity markets.

The compiled data permit the construction of financial structure indicators to measure whether, for example, a country's banks are larger, more active, and more efficient than its stock markets.

These indicators can then be used to investigate the empirical link between the legal, regulatory, and policy environment and indicators of financial structure. They can also be used to analyze the implications of financial structure for economic growth.

Beck, Demirguc-Kunt, and Levine describe the sources and construction of, and the intuition behind, different indicators and present descriptive statistics.

This paper - a product of Finance, Development Research Group - is part of a broader effort in the group to understand the determinants of financial structure and its importance to economic development. The authors may be contacted at tbeck@worldbank.org, ademirguckunt@worldbank.org, or rlevine@csom.umn.edu.

Abstract:
This paper describes a new cross-country database on the importance of small and medium enterprises (SMEs). This database is unique in that it presents consistent and comparable information on the contribution of the SME sector to total employment and GDP across different countries. The dataset improves on existing publicly available datasets on several grounds. First, it extends coverage to a broader set of developing and industrial economies. Second, it provides information on the contribution of the SME sector using a uniform definition of SMEs across different countries, allowing for consistent cross-country comparisons. Third, while we follow the traditional definition of the SME sector as being part of the formal sector, the new database also includes the size of the SME sector relative to the informal sector. This paper describes the sources and the construction of the different indicators, presents descriptive statistics, and explores correlations with other socioeconomic variables.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to study SME-related issues.

Abstract:
Analysis of a panel data set for 1976-1998 shows that on balance stock markets and banks positively influence economic growth - findings that do not result from biases induced by simultaneity, omitted variables, or unobserved country-specific effects.

Beck and Levine investigate the impact of stock markets and banks on economic growth using a panel data set for 1976-1998 and applying recent generalized method of moments (GMM) techniques developed for dynamic panels. The authors illustrate econometrically the differences that emerge from different panel procedures. On balance, stock markets and banks positively influence economic growth - and these findings are not a result of biases induced by simultaneity, omitted variables, or unobserved country-specific effects.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to understand the links between the financial system and economic growth. The authors may be contacted at tbeck@worldbank.org or rlevine@csom.umn.edu.

Abstract:
Motivated by public policy debates about bank consolidation and conflicting theoretical predictions about the relationship between the market structure of the banking industry and bank fragility, this paper studies the impact of bank concentration, bank regulations, and national institutions on the likelihood of suffering a systemic banking crisis. Using data on 70 countries from 1980 to 1997, we find that crises are less likely in economies with (i) more concentrated banking systems, (ii) fewer regulatory restrictions on bank competition and activities, and (iii) national institutions that encourage competition.

Abstract:
Motivated by public policy debates about bank consolidation and conflicting theoretical predictions about the relationship between the market structure of the banking industry and bank fragility, this paper studies the impact of bank concentration, bank regulations, and national institutions on the likelihood of suffering a systemic banking crisis. Using data on 70 countries from 1980 to 1997, we find that crises are less likely in economies with (i) more concentrated banking systems, (ii) fewer regulatory restrictions on bank competition and activities, and (iii) national institutions that encourage competition.

Industrial Structure, Banking System Fragility, Regulation

Abstract:
The authors examine whether financial development boosts the growth of small firms more than large firms and hence provides information on the mechanisms through which financial development fosters aggregate economic growth. They define an industry's technological firm size as the firm size implied by industrial specific production technologies, including capital intensities and scale economies. Using cross-industry, cross-country data, the results indicate that financial development exerts a disproportionately large effect on the growth of industries that are technologically more dependent on small firms. This suggests that financial development accelerates economic growth by removing growth constraints on small firms and also implies that financial development has sectoral as well as aggregate growth ramifications.

This paper - a product of the Finance Group, Development Research Group - is part of a larger effort in the group to understand the growth finance link.

Firm Size, Financial Development, Economic Growth

Abstract:
This paper examines whether financial development boosts the growth of small firms more than large firms and hence provides information on the mechanisms through which financial development fosters aggregate economic growth. We define an industry's technological firm size as the firm size implied by industry specific production technologies, including capital intensities and scale economies. Using cross-industry, cross-country data, the results indicate that financial development exerts a disproportionately large effect on the growth of industries that are technologically more dependent on small firms. This suggests that financial development accelerates economic growth by removing growth constraints on small firms and also implies that financial development has sectoral as well as aggregate growth ramifications.

Abstract:
This paper assesses empirically two theories of why legal origin influences financial development. The political channel stresses that legal traditions differ in the priority they give to the rights of individual investors vis-a-vis the state and this has repercussions for financial development. The adaptability channel holds that legal traditions differ in their ability to adjust to changing commercial circumstances and legal systems that adapt quickly will foster financial development more effectively. We use historical comparisons and cross-country regressions to assess the validity of these two channels. We find that legal origin matters for financial development because legal traditions differ in their ability to adapt efficiently to evolving economic conditions.

Law, Financial development

Abstract:
New research suggests that cross-country differences in legal origin help explain differences in financial development. This paper empirically assesses two theories of why legal origin influences financial development. First, the 'political' channel stresses that (i) legal traditions differ in the priority they give to the rights of individual investors vis-a-vis the state and (ii) this has repercussions for the development of property rights and financial markets. Second, the 'adaptability' channel holds that (i) legal traditions differ in their ability to adjust to changing commercial circumstances and (ii) legal systems that adapt quickly to minimize the gap between the contracting needs of the economy and the legal system's capabilities will foster financial development more effectively than would more rigid legal traditions. We use historical comparisons and cross-country regressions to assess the validity of these two channels. We find that legal origin matters for financial development because legal traditions differ in their ability to adapt efficiently to evolving economic conditions.

Abstract:
A growing body of work suggests that cross-country differences in legal origin help explain differences in financial development. Beck, Demirguc-Kunt, and Levine assess two theories of why legal origin influences financial development. First, the "political" channel stresses that (1) legal traditions differ in the priority they give to the rights of individual investors compared with the state, and that (2) this has repercussions for the development of property rights and financial markets. Second, the "adaptability" channel holds that (1) legal traditions differ in their ability to adjust to changing commercial circumstances, and (2) legal systems that adapt quickly to minimize the gap between the contracting needs of the economy and the legal system's capabilities will foster financial development more effectively than would more rigid legal traditions. The authors use historical comparisons and cross-country regressions to assess the validity of these two channels.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to understand the determinants of financial development.

Abstract:
Development of the banking sector exerts a large, causal impact on total factor productivity growth, which in turn causes GDP to grow. Whether banking development has a long-run effect on capital growth or private saving remains to be seen.

Beck, Levine, and Loayza evaluate whether the level of development in the banking sector exerts a causal impact on economic growth and its sources- total factor productivity growth, physical capital accumulation, and private saving.

They use (1) a pure cross-country instrumental variable estimator to extract the exogenous component of banking development and (2) a new panel technique that controls for country-specific effects and endogeneity. They find that:

- Banks do exert a large, causal impact on total factor productivity growth, which feeds through to overall GDP growth.
- The long-run links between banking development and both capital growth and private savings are more tenuous.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to understand the links between the financial system and economic growth.

Abstract:
Beck, Demirguc-Kunt, and Levine explore the relationship between the relative size of the small and medium enterprise (SME) sector, economic growth, and poverty using a new database on the share of SME labor in the total manufacturing labor force. Using a sample of 76 countries, they find a strong association between the importance of SMEs and GDP per capita growth. This relationship, however, is not robust to controlling for simultaneity bias. So, while a large SME sector is characteristic of successful economies, the data fail to support the hypothesis that SMEs exert a causal impact on growth. Furthermore, the authors find no evidence that SMEs reduce poverty. Finally, they find qualified evidence that the overall business environment facing both large and small firms - as measured by the ease of firm entry and exit, sound property rights, and contract enforcement - influences economic growth.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to understand the role of SMEs.

Abstract:
A burgeoning literature finds that financial development exerts a first-order impact on long-run economic growth, which raises critical questions, such as why do some countries have well-developed growth-enhancing financial systems while others do not? The law and finance theory focuses on the role of legal institutions in explaining international differences in financial development. First, the law and finance theory holds that in countries where legal systems enforce private property rights, support private contractual arrangements, and protect the legal rights of investors, savers are more willing to finance firms and financial markets flourish. Second, the different legal traditions that emerged in Europe over previous centuries and were spread internationally through conquest, colonization, and imitation help explain cross-country differences in investor protection, the contracting environment, and financial development today. But there are countervailing theories and evidence that challenge both parts of the law and finance theory. Many argue that there is more variation within than across legal origin families. Others question the central role of legal tradition and point to politics, religious orientation, or geography as the dominating factor driving financial development. Finally, some researchers question the central role of legal institutions and argue that other factors, such as a competitive products market, social capital, and informal rules are also important for financial development. Beck and Levine describe the law and finance theory, along with skeptical and competing views, and review empirical evidence on both parts of the law and finance view.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to understand the link between financial development and economic growth. It was prepared for Claude Menard and Mary Shirley, eds., Handbook of New Institutional Economics, Kluwer Dordrecht (The Netherlands), forthcoming (2004).

Abstract:
This paper provides a concise, selective review of research on the role of legal institutions in shaping the operation of financial systems. While a burgeoning literature finds that financial development exerts a first-order impact on economic growth, the law and finance literature seeks to understand the role of legal institutions in explaining international differences in financial systems. Considerable research dissects, critiques, and debates the influence of investor protection laws, the efficiency of contract enforcement, and private property rights protection on the effectiveness of corporate governance, the efficient allocation of capital, and the overall level of financial development. Furthermore, legal scholars, political scientists, historians, and economists are questioning and assessing the importance of historically determined differences in legal traditions in shaping national approaches to investor protection laws, contract enforcement, and property rights. The field of law and finance promises to be a contentious and important area of inquiry in coming years.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
This paper investigates the impact of stock markets and banks on economic growth using a panel data set for the period 1976-98 and applying recent GMM techniques developed for dynamic panels. On balance, we find that stock markets and banks positively influence economic growth and these findings are not due to potential biases induced by simultaneity, omitted variables or unobserved country-specific effects.

Abstract:
This paper investigates the impact of stock markets and banks on economic growth using a panel data set for the period 1976-98 and applying recent GMM techniques developed for dynamic panels. On balance, we find that stock markets and banks positively influence economic growth and these findings are not due to potential biases induced by simultaneity, omitted variables or unobserved country-specific effects.

Economic Growth, Stock Markets, Banks

Abstract:
A country's level of financial development and the legal environment in which financial intermediaries and markets operate critically influence economic development. In countries whose financial sectors are more fully developed and whose legal systems protect the rights of outside investors, economies grow faster, industries dependent on external finance expand more quickly, new firms are created more easily, firms have more access to external financing, and firms grow faster.

Beck, Demirguc-Kunt, Levine, and Maksimovic explore the relationship between financial structure - the degree to which a financial system is market- or bank-based - and economic development.

They use three methodologies:
· The cross-country approach uses cross-country data to assess whether economies grow faster with market- or bank-based systems.
· The industry approach uses a country-industry panel to assess whether industries that depend heavily on external financing grow faster in market- or bank-based financial systems and whether financial structure influences the rate at which new firms are created.
· The firm-level approach uses firm-level data across a broad selection of countries to test whether firms are more likely to grow beyond the rate predicted by internal resources and short-term borrowings in market- or bank-based financial systems.

The cross-country regressions, the industry panel estimations, and the firm-level analyses provide remarkably consistent conclusions:
· Financial structure is not an analytically useful way to distinguish financial systems.
· Financial structure does not help us understand economic growth, industrial performance, or firm expansion.
· The results are inconsistent with both market-based and bank-based views.

In other words, economies do not grow faster, industries dependent on external financing do not expand faster, new firms are not created more easily, firms' access to external finance is not greater, and firms do not grow faster in either market- or bank-based financial systems.

The authors find overwhelming evidence that the overall level of financial development and the legal environment in which financial intermediaries and markets operate critically influence economic development.

This paper is a product of Finance, Development Research Group. The study was funded by the Bank's Research Support Budget under the research project Financial Structures and Economic Development (RPO 682-41). The authors may be contacted at tbeck@worldbank.org or ademirguckunt@worldbank.org.

Abstract:
This paper contributes to the literature on how a country's legal origin influences the operation of its financial system by using firm-level survey data on the obstacles that firms face in raising external finance. The paper assesses two channels through which legal origin may influence the financial system. It finds that the adaptability of a country's legal system is more important for explaining the obstacles that firms face in accessing external finance than the political independence of the judiciary.

Abstract:
This paper contributes to the literature on how a country's legal origin influences the operation of its financial system by using firm-level survey data on the obstacles that firms face in raising external finance. The paper assesses two channels through which legal origin may influence the financial system. It finds that the adaptability of a country's legal system is more important for explaining the obstacles that firms face in accessing external finance than the political independence of the judiciary.

Legal system, judicial independence, corporate finance

Abstract:
Beck, Cull, and Jerome assess the effect of privatization on performance in a panel of Nigerian banks for the period 1990-2001. They find evidence of performance improvement in nine banks that were privatized, which is remarkable given the inhospitable environment for true financial intermediation. Their results also suggest negative effects of the continuing minority government ownership on the performance of many Nigerian banks. The authors' results complement aggregate indications of decreasing financial intermediation over the 1990s. Banks that focused on investment in government bonds and non-lending activities enjoyed a relatively higher performance.

This paper - a product of the Finance Team, Development Research Group - is part of a larger effort in the group to study the effects of bank privatization in developing countries.

Bank privatization, Nigeria, Bank performance

Abstract:
While substantial research finds that financial development boosts overall economic growth, we study whether financial development disproportionately raises the incomes of the poor and alleviates poverty. Using a broad cross-country sample, we distinguish among competing theoretical predictions about the impact of financial development on changes in income distribution and poverty alleviation. We find that financial development reduces income inequality by disproportionately boosting the incomes of the poor. Countries with better-developed financial intermediaries experience faster declines in measures of both poverty and income inequality. These results are robust to controlling for other country characteristics and potential reverse causality.

Abstract:
While substantial research finds that financial development boosts overall economic growth, Beck, Demirguc-Kunt, and Levine study whether financial development is pro-poor: Does financial development disproportionately raise the income of the poor? Using a broad cross-country sample, the authors find that the answer is yes: Financial intermediary development reduces income inequality by disproportionately boosting the income of the poor and therefore reduces poverty. This result is robust to controlling for simultaneity bias and reverse causation.

This paper - a product of Finance Team, Development Research Group - is part of a larger effort in the group to understand the link between finance and poverty alleviation.

Abstract:
Beck, Demirguc-Kunt, and Levine examine the impact of bank supervision on the financing obstacles faced by almost 5,000 corporations across 49 countries. They find that firms in countries with strong official supervisory agencies that directly monitor banks tend to face greater financing obstacles. Moreover, powerful official supervision tends to increase firm reliance on special connections and corruption in raising external finance, which is consistent with political and regulatory capture theories. Creating a supervisory agency that is independent of the government and banks mitigates the adverse consequences of powerful supervision. Finally, the authors find that bank supervisory agencies that force accurate information disclosure by banks and enhance private monitoring tend to ease the financing obstacles faced by firms.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to understand the impact of bank supervision and regulation.

Bank supervision, Corporate governance, Financing obstacles

Abstract:
We examine the impact of bank supervision on the financing obstacles faced by almost 5,000 corporations across 49 countries. We find that firms in countries with strong official supervisory agencies that directly monitor banks tend to face greater financing obstacles. Moreover, powerful official supervision tends to increase firm reliance on special connections and corruption in raising external finance, which is consistent with political/regulatory capture theories. Creating a supervisory agency that is independent of the government and banks mitigates the adverse consequences of powerful supervision. Finally, we find that bank supervisory agencies that force accurate information disclosure by banks and enhance private monitoring tend to ease the financing obstacles faced by firms.

Abstract:
Drawing on the recent literature on economic institutions and the origins of economic development, we offer a political economy explanation of why institution building has varied so much across transition economies. We identify dependence on natural resources and the historical experience of these countries during socialism as major determinants of institution building during transition. Using natural resource reliance and the years under socialism to extract the exogenous component of institution building, we also show the importance of institutions in explaining the variation in economic development and growth across transition economies during the first decade of transition.

Transition economies, institutions, economic development

Abstract:
Drawing on the recent literature on economic institutions and the origins of economic development, the authors offer a political economy explanation of why institution building has varied so much across transition economies. They identify dependence on natural resources and the historical experience of these countries during socialism as major determinants of institution building during transition by influencing the political structure and process during the initial years. Their empirical analysis shows that countries that are more reliant on natural resources and spent a longer time under socialist governments are more likely to see former communists remain in power and to start the transition process with less open political systems, with negative repercussions for the development of market-compatible institutions. Using natural resource reliance and the years under socialism to extract the exogenous component of institution building, the authors also show the importance of institutions in explaining the variation in economic development and growth across transition economies during the first decade of transition.

Transition economies, Institutions, economic development

Abstract:
This paper reviews different econometric methodologies to assess the relationship between financial development and growth. It illustrates the identification problem, which is at the center of the finance and growth literature, using the example of a simple Ordinary Least Squares estimation. It discusses cross-sectional and panel instrumental variable approaches to overcome the identification problem. It presents the time-series approach, which focuses on the forecast capacity of financial development for future growth rates, and differences-in-differences techniques that try to overcome the identification problem by assessing the differential effect of financial sector development across states with different policies or across industries with different needs for external finance. Finally, it discusses firm-level and household approaches that allow analysts to dig deeper into the channels and mechanisms through which financial development enhances growth and welfare, but pose their own methodological challenges.

Access to Finance, Achieving Shared Growth, Economic Theory & Research, Debt Markets, Statistical & Mathematical Sciences

Abstract:
Information from 209 banks in 62 countries is used to develop new indicators of barriers to banking services around the world, show their correlation with measures of outreach, and explore their association with bank and country characteristics suggested by theory as potential determinants. Barriers such as minimum account and loan balances, account fees, and required documents are associated with lower levels of banking outreach. While country characteristics linked with financial depth, such as the effectiveness of creditor rights, contract enforcement mechanisms, and credit information systems, are weakly correlated with barriers, strong associations are found between barriers and measures of restrictions on bank activities and entry, bank disclosure practices and media freedom, and development of physical infrastructure. In particular, barriers are higher in countries where there are more stringent restrictions on bank activities and entry, less disclosure and media freedom, and poorly developed physical infrastructure. Also, barriers for bank customers are higher where banking systems are predominantly government-owned and are lower where there is more foreign bank participation. Larger banks seem to impose lower barriers on customers, perhaps because they are better positioned to exploit economies of scale and scope.

G2, G21, O16

Abstract:
Using information from 193 banks in 58 countries, the authors develop and analyze indicators of physical access, affordability, and eligibility barriers to deposit, loan, and payment services. They find substantial cross-country variation in barriers to banking and show that in many countries these barriers can potentially exclude a significant share of the population from using banking services. Correlations with bank- and country-level variables show that bank size and the availability of physical infrastructure are the most robust predictors of barriers. Further, the authors find evidence that in more competitive, open, and transparent economies, and in countries with better contractual and informational frameworks, banks impose lower barriers. Finally, though foreign banks seem to charge higher fees than other banks, in foreign dominated banking systems fees are lower and it is easier to open bank accounts and to apply for loans. On the other hand, in systems that are predominantly government-owned, customers pay lower fees but also face greater restrictions in terms of where to apply for loans and how long it takes to have applications processed. These findings have important implications for policy reforms to broaden access.

Banks & Banking Reform, Financial Intermediation, Economic Theory & Research, Financial Crisis Management & Restructuring, Competitiveness and Competition Policy

Abstract:
Using data from a survey of 91 banks in 45 countries, the authors characterize bank financing to small and medium enterprises (SMEs) around the world. They find that banks perceive the SME segment to be highly profitable, but perceive macroeconomic instability in developing countries and competition in developed countries as the main obstacles. To serve SMEs banks have set up dedicated departments and decentralized the sale of products to the branches. However, loan approval, risk management, and loan recovery functions remain centralized. Compared with large firms, banks are less exposed to small enterprises, charge them higher interest rates and fees, and experience more non-performing loans from lending to them. Although there are some differences in SMEs financing across government, private, and foreign-owned banks - with the latter being more likely to engage in arms-length lending - the most significant differences are found between banks in developed and developing countries. Banks in developing countries tend to be less exposed to SMEs, provide a lower share of investment loans, and charge higher fees and interest rates. Overall, the evidence suggests that the lending environment is more important than firm size or bank ownership type in shaping bank financing to SMEs.

Banks & Banking Reform, Access to Finance, Small and Medium Size Enterprises

Abstract:
Some say that democracy is more likely to survive under parliamentary governments. That result is not robust to the use of different variables from the Database of Political Institutions, a large new cross-country database that may illuminate many other issues affecting and affected by political institutions.

This paper introduces a large new cross-country database on political institutions: The Database on Political Institutions (DPI). Beck, Clarke, Groff, Keefer, and Walsh summarize key variables (many of them new), compare this data set with others, and explore the range of issues for which the data should prove invaluable. Among the novel variables they introduce:

Several measures of tenure, stability, and checks and balances.

Identification of parties with the government coalition or the opposition.

Fragmentation of opposition and government parties in legislatures.

The authors illustrate the application of DPI variables to several problems in political economy. Stepan and Skach, for example, find that democracy is more likely to survive under parliamentary governments than presidential systems. But this result is not robust to the use of different variables from the DPI, which raises puzzles for future research.

Similarly, Roubini and Sachs find that divided governments in the OECD run higher budget deficits after fiscal shocks. Replication of their work using DPI indicators of divided government indicates otherwise, again suggesting issues for future research.

Among questions in political science and economics that this database may illuminate: The determinants of democratic consolidation, the political conditions for economic reform, the political and institutional roots of corruption, and the elements of appropriate and institutionally sensitive design of economic policy.

This paper - a product of Regulation and Competition Policy, Development Research Group - is part of a larger effort in the group to understand the institutional bases of poverty alleviation and economic reform. The study was funded by the Bank's Research Support Budget under the research project Database on Institutions for Government Decisionmaking (RPO 682-79).

Abstract:
This paper examines whether financial development boosts the growth of small firms more than large firms and hence provides information on the mechanisms through which financial development fosters aggregate economic growth. We define an industry's technological firm size as the firm size implied by industry specific production technologies, including capital intensities and scale economies. Using cross-industry, cross-country data, the results indicate that financial development exerts a disproportionately large effect on the growth of industries that are technologically more dependent on small firms. This suggests that financial development accelerates economic growth by removing growth constraints on small firms and also implies that financial development has sectoral as well as aggregate growth ramifications.

Firm size, financial development, economic growth

Abstract:
Using a firm-level survey database covering 48 countries, Beck, Demirgüç-Kunt, and Maksimovic investigate whether differences in financial and legal development affect the way firms finance their investments. The results indicate that external financing of investments is not a function of institutions, although the form of external finance is. The authors identify two explanations for this. First, legal and financial institutions affect different types of external finance in offsetting ways. Second, firm size is an important determinant of whether firms can have access to different types of external finance. Larger firms with financing needs are more likely to use external finance compared with small firms. The results also indicate that these firms are more likely to use external finance in more developed financial systems, particularly debt and equity finance. The authors also find evidence consistent with the pecking order theory in financially developed countries, particularly for large firms.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to understand firms' access to financial services.

Abstract:
Theory makes ambiguous predictions about the relationship between market structure and competitiveness of the banking system and banking sector stability. Empirical studies focusing on individual countries provide similarly ambiguous results, while cross-country studies point mostly to a positive relationship between competition and stability in the banking system. Where liberalization and unfettered competition have resulted in fragility, this has been mostly the consequence of regulatory and supervisory failures. The advantages of competition for an efficient and inclusive financial system are strong, and regulatory and supervisory policies should focus on an incentive-compatible environment for banking rather than try to fine-tune market structure or the degree of competition.

Banks & Banking Reform, Access to Finance, Emerging Markets, Debt Markets, Labor Policies

Abstract:
Financial sector development fosters economic growth and reduces poverty by widening and broadening access to finance and allocating society's savings more efficiently. The author first discusses three pillars on which sound and efficient financial systems are built: macroeconomic stability and effective and reliable contractual and informational frameworks. He then describes three different approaches to government involvement in the financial sector: the laissez-faire view, the market-failure view and the market-enabling view. Finally, the author analyzes the sequencing of financial sector reforms and discusses the benefits and challenges that emerging markets face when opening their financial systems to international capital markets.

Banks & Banking Reform, Debt Markets, Access to Finance, Financial Intermediation

Abstract:
Deposit insurance schemes and bank failure resolution systems are asked to fulfill conflicting public policy objectives: On the one hand, they are supposed to protect small depositors and prevent contagion risks from bank runs; on the other hand, they are supposed to minimize aggressive risk taking by banks. Beck discusses the incentive-compatible design and interaction of both components of the financial safety net and describes and compares three countries with different safety net arrangements - Brazil, Germany, and Russia.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to understand the effects of deposit insurance and bank failure resolution.

Deposit insurance, Bank failure resolution, Brazil, Germany, Russia

Abstract:
Theory makes ambiguous predictions about the effects of bank concentration on access to external finance. Using a unique data base for 74 countries of financing obstacles and financing patterns for firms of small, medium, and large size, Beck, Demirguc-Kunt, and Maksimovic assess the effects of banking market structure on financing obstacles and the access of firms to bank finance. The authors find that bank concentration increases financing obstacles and decreases the likelihood of receiving bank finance, with the impact decreasing in size. The relation of bank concentration and financing obstacles is dampened in countries with well developed institutions, higher levels of economic and financial development, and a larger share of foreign-owned banks. The effect is exacerbated by more restrictions on banks' activities, more government interference in the banking sector, and a larger share of government-owned banks. Finally, it is possible to alleviate the negative impact of bank concentration on access to finance by reducing activity restrictions.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to understand the effects of bank competition.

Abstract:
Using a unique firm-level survey data base covering 54 countries, Beck, Demirguc-Kunt, and Maksimovic investigate whether different financial, legal, and corruption issues that firms report as constraints actually affect their growth rates. The results show that the extent to which these factors constrain a firm's growth depends very much on its size and that it is consistently the smallest firms that are most adversely affected by all three constraints. Firm growth is more affected by reported constraints in countries with underdeveloped financial and legal systems and higher corruption. So, policy measures to improve financial and legal development and reduce corruption are well justified in promoting firm growth, particularly the development of the small and medium enterprise sector. But the evidence also shows that the intuitive descriptors of an "efficient" legal system are not correlated with the components of the general legal constraints that predict firm growth. This finding suggests that the mechanism by which the legal systems affects firm performance is not well understood. The authors' findings also provide evidence that the corruption of bank officials constrains firm growth. This "institutional failure" should be taken into account when modeling the monitoring role of financial institutions in overcoming market failures due to informational asymmetries.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to understand the link from the financial sector to economic development. The authors may be contacted at tbeck@worldbank.org, ademirguckunt@worldbank.org, or vmaksimovic@rhsmith.umd.edu.

Abstract:
While Bangladesh has embarked on a path to reform its financial system, most prominently by privatizing its government-owned banks, the Nationalized Commercial Banks (NCBs), a sustainable long-term expansion of the financial system requires a more substantial change in the role of government. Using recent research and international comparisons, this paper argues that the government should move from its role as an operator and arbiter in the financial system to a facilitator role. This implies not only divestment from government-owned banks, but also de-politicization of the licensing process and a market-based bank failure resolution framework that focuses on intermediation and not on the rescue of individual institutions. Most important, the government should move away from the implicit guarantee for depositors and owners to applying the existing limited explicit deposit insurance for depositors, while simultaneously relying more on market participants to monitor and discipline banks instead of micro-managing financial institutions. This redefinition of government's role should not be limited to the banking system, but applies to other segments of the financial system, such as capital markets and the micro-finance sector, and should be seen as an essential element in the governance reform agenda and in the movement from a relationship-based economy to a market and arms-length economy.

Banks & Banking Reform, Economic Theory & Research, Financial Intermediation, Investment and Investment Climate, Corporate Law

Abstract:
The authors (1) present new indicators of banking sector penetration across 99 countries based on a survey of bank regulatory authorities, (2) show that these indicators predict household and firm use of banking services, (3) explore the association between the outreach indicators and measures of financial, institutional, and infrastructure development across countries, and (4) relate these banking outreach indicators to measures of firms' financing constraints. In particular, they find that greater outreach is correlated with standard measures of financial development, as well as with economic activity. Controlling for these factors, the authors find that better communication and transport infrastructure and better governance are also associated with greater outreach. Government ownership of financial institutions translates into lower access, while more concentrated banking systems are associated with greater outreach. Finally, firms in countries with higher branch and ATM penetration and higher use of loan services report lower financing obstacles, thus linking banking sector outreach to the alleviation of firms' financing constraints.

Abstract:
Although by regional standards Kenya's financial system is relatively well developed and diversified, major structural impediments prevent it from reaching its full potential. Cross-country comparisons, however, show the importance of a well developed financial sector for long-term economic growth and poverty alleviation. Experience from other developing economies has shown the detrimental effect of government ownership and the positive impact that foreign bank ownership can have on the development of a market-based financial system. Analyzing and decomposing the high interest rate spreads and margins in Kenya helps identify structural impediments that drive the high cost of and low access to financial services. The limited information sharing on debtors, deficiencies in the legal and judicial system, the limited number of strong and reputable banks, and nontransparency and uncertainty in the banking market are major impediments to the development of Kenya's financial system, and to reducing spreads and widening access.

This paper - a product of the Finance Team, Development Research Group - is part of a larger effort in the group to understand the determinants of financial sector development.

Abstract:
Access to financial services, or rather the lack thereof, is often indiscriminately decried as problem in many developing countries. This paper argues that the problem of access should rather be analyzed by identifying different demand and supply constraints. We use the concept of an access possibilities frontier, drawn for a given set of state variables, to distinguish between cases where a financial system settles below the constrained optimum, cases where this constrained optimum is too low, andin credit servicescases where the observed outcome is excessively high. We distinguish between payment and savings services and fixed intermediation costs, on the one hand, and lending services and different sources of credit risk, on the other hand. We include both supply and demand side frictions that can lead to lower access. The analysis helps identify bankable and banked population, the binding constraint to close the gap between the two, and policies to prudently expand the bankable population. This new conceptual framework can inform the debate on adequate policies to expand access to financial services and can serve as basis for an informed measurement of access.

Abstract:
Access to financial services, or rather the lack thereof, is often indiscriminately decried as a problem in many developing countries. The authors argue that the problem of access should rather be analyzed by identifying different demand and supply constraints. They use the concept of an access possibilities frontier, drawn for a given set of state variables, to distinguish between cases where a financial system settles below the constrained optimum, cases where this constrained optimum is too low, and - in credit services - cases where the observed outcome is excessively high. They distinguish between payment and savings services and fixed intermediation costs, on the one hand, and lending services and different sources of credit risk, on the other hand. The authors include both supply and demand side frictions that can lead to lower access. The analysis helps identify bankable and banked population, the binding constraint to close the gap between the two, and policies to prudently expand the bankable population. This new conceptual framework can inform the debate on adequate policies to expand access to financial services and can serve as the basis for an informed measurement of access.

Banks & Banking Reform, Economic Theory & Research, Markets and Market Access, Access to Markets, Financial Intermediation

Abstract:
Germany's private deposit insurance scheme with its "clublike" nature, cannot easily be transplanted to countries with weaker institutions. But it offers useful lessons for countries that want to set up a new scheme or reform an existing one.

Beck describes and evaluates the deposit insurance scheme set up by private commercial banks in Germany in 1975. The scheme's funding and management are completely private, with no public supervision. Where other schemes rely on monitoring by depositors to decrease moral hazard problems, the German scheme relies on peer monitoring by its member banks. The system has weathered several small bank crises but has not yet been exposed to a major bank failure or a systemic crisis.

To what extent can it serve as a model for other countries? The success of the German scheme has to be judged against an institutional environment that fosters contract enforcement and the rule of law and discourages corruption. In a country with weaker institutions, the voluntary membership might quickly lead to adverse selection, with strong banks leaving the scheme. The high coverage limit might induce bank managers and owners to abuse the scheme. Banks might intentionally underfund the scheme, counting on additional government resources in times of crisis. And the secrecy of funds might decrease fund managers' accountability in societies with little transparency and much corruption.

In Germany's highly concentrated commercial banking sector, the small number of banks facilitates a club atmosphere and quick resolution of banking crises. But it could also prevent the entry of new, innovative market participants, so that the club becomes a cartel. Germany's anti-bankruptcy bias might help prevent moral hazard but can also stifle entrepreneurship. There is a tradeoff between the efficiency gain of a privately run deposit insurance scheme and its potentially negative impact on competition and entrepreneurship.

Although the scheme cannot easily be transplanted to developing countries, it offers lessons for other economies. Schemes with a clublike character reinforce peer monitoring and minimize the risk of free riding. Risk-based premiums based on auditing by the deposit insurance scheme create a healthy link between the protection an insurance offers and the moral hazard it aims to prevent. One compromise might be a combination of ex ante funding that guarantees credibility with depositors and ex post bank funding that gives banks an incentive to monitor one another to minimize costs.

This paper - a product of the Financial Sector Strategy and Development Department - is part of a larger effort in the department to understand the link between financial development and economic growth.

Abstract:
This paper introduces the updated and expanded version of the Financial Development and Structure Database and presents recent trends in structure and development of financial institutions and markets across countries. The authors add indicators on banking structure and financial globalization. They find a deepening of both financial markets and institutions, a trend concentrated in high-income countries and more pronounced for markets than for banks. Similarly, the recent increase in cross-border lending and debt issues has been concentrated in high-income countries, while low and lower-middle income countries have experienced an increase in remittance flows. Low net interest margins, rising profitability and declining stability in high-income countries’ banking sectors characterize the recent financial sector boom in high income countries leading up to the global financial crisis of 2007.

Debt Markets, Emerging Markets, Banks & Banking Reform, Economic Theory & Research

Abstract:
Using a unique bank-level data set on the Ugandan banking system during 1999-2005, the authors explore the factors behind consistently high interest rate spreads and margins. While foreign banks charge lower interest rate spreads, they do not find a robust and economically significant relationship between privatization, foreign bank entry, market structure, and banking efficiency. Similarly, macroeconomic variables can explain little of the over-time variation in bank spreads. Bank-level characteristics, on the other hand, such as bank size, operating costs, and composition of loan portfolio explain a large proportion of cross-bank, cross-time variation in spreads and margins. However, time-invariant bank-level fixed effects explain the largest part of bank variation in spreads and margins. Further, the authors find tentative evidence that banks targeting the low end of the market incur higher costs and therefore higher margins.

Banks & Banking Reform, Economic Theory & Research, Investment and Investment Climate, Financial Crisis Management & Restructuring, Financial Intermediation

Abstract:
Do industries that depend heavily on external finance grow faster in market-based or bank-based financial systems? Are new firms more likely to form in a bank-based or a market-based financial system? Beck and Levine find no evidence for the superiority of either market-based or bank-based financial systems for industries dependent on external financing. But they find overwhelming evidence that industries heavily dependent on external finance grow faster in economies with higher levels of financial development and with better legal protection for outside investors - including strong creditor and shareholder rights and strong contract enforcement mechanisms.

Financial development also stimulates the establishment of new firms, which is consistent with the Schumpeterian view of creative destruction. Financial development matters. That the financial system is bank-based or market-based offers little additional information.

This paper - a product of the Financial Sector Strategy and Policy Department - is part of a larger effort in the department to understand the link between financial development and economic growth.

Financial Structure, Economic Growth, External Finance

Abstract:
There is a wide cross-country variation in the institutional structure of bank failure resolution, including the role of the deposit insurer. The authors use quantitative analysis for 57 countries and discuss specific country cases to illustrate this variation. Using data for over 1,700 banks across 57 countries, they show that banks in countries where the deposit insurer has the responsibility of intervening failed banks and the power to revoke membership in the deposit insurance scheme are more stable and less likely to become insolvent. Involvement of the deposit insurer in bank failure resolution thus dampens the negative effect that deposit insurance has on banks' risk taking.

Banks & Banking Reform, Financial Crisis Management & Restructuring, Financial Intermediation, Corporate Law, Insurance & Risk Mitigation

Abstract:
May 2001
Does financial development translate into a comparative advantage in industries that use more external finance? Yes, it does.

Using industry-level data on firms' dependence on external finance - data for 36 industries and 56 countries - Beck shows that countries with better developed financial systems have higher export shares and trade balances in industries that use more external finance.

These results are robust to the use of alternative measures of external dependence and financial development and are not attributable to reverse causality or simultaneity bias.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to understand the link between financial development and economic growth. The author may be contacted at tbeck@worldbank.org.

Abstract:
Does financial development translate into a comparative advantage in industries that use more external finance? The author uses industry-level data on firms' dependence on external finance for 36 industries and 56 countries to examine this question. It is shown that countries with better-developed financial systems have higher export shares and trade balances in industries that use more external finance. These results are robust to the use of alternative measures of external dependence and financial development and are not due to reverse causality or simultaneity bias.

Abstract:
Beck, Demirguc-Kunt, and Maksimovic investigate how a country's financial institutions and the quality of its legal system explain the size attained by its largest industrial firms in a sample of 44 countries. Firm size is positively related to the size of the banking system and the efficiency of the legal system. Thus, the authors find no evidence that firms are larger in order to internalize the functions of the banking system or to compensate for the general inefficiency of the legal system. But they do find evidence that externally financed firms are smaller in countries that have strong creditor rights and efficient legal systems. This suggests that firms in countries with weak creditor protections are larger in order to internalize the protection of capital investment.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to understand the determinants of firm size.

Abstract:
This paper presents data on 76 partial credit guarantee schemes across 46 developed and developing countries. Based on theory, the authors discuss different organizational features of credit guarantee schemes and their variation across countries. They focus on the respective role of government and the private sector and different pricing and risk reduction tools and how they are correlated across countries. The findings show that government has an important role to play in funding and management, but less so in risk assessment and recovery. There is a surprisingly low use of risk-based pricing and limited use of risk management mechanisms.

Abstract:
This paper analyzes the different options - liquidation, federalization, privatization and restructuring - that the Brazilian state government had for the transformation of state banks under the Programa de Incentivo a Reducao do Setor Publico Estadual na Atividade Bancaria (PROES) in the late 1990s. Specifically, the paper explores (i) the factors behind the states' choices and (ii) the effects of the transformation process on bank performance and efficiency. We find that states that were more dependent on federal transfers, whose banks were already under federal intervention and that established development agencies were more likely to relinquish control over their banks and transformation processes. We find that privatized banks improved their performance, while restructured banks did not.

Bank privatization, Brazil, bank performance

Abstract:
Capitalizing on recent improvements in the availability of cross-country financial sector data, this paper proposes a standard methodology for benchmarking the policy component of financial development. Systematic controls are introduced to isolate main structural country characteristics and a principal components analysis is used to help identify a parsimonious set of ten "core" outcome indicators from a broader set of twenty seven potential indicators covering different dimensions of development in both financial institutions and financial markets. Such a broad-based approach helps reveal important determinants and regularities of the process of financial development. The paper also identifies some of the main data gaps that will need to be filled to allow further progress in financial benchmarking looking forward.

Debt Markets, Emerging Markets, Economic Theory & Research, Access to Finance

Abstract:
To improve on the low level and low efficiency of Brazil's financial intermediation (and hence economic growth), Brazil needs reforms leading to a more efficient judicial sector, better enforcement of contracts, stronger rights for creditors, stronger accounting standards and practices, and a legal and regulatory framework that facilitates the exchange of information about borrowers.

Reforms to improve both the level and the efficiency of financial intermediation in Brazil should be high on Brazilian policymakers' agendas, because of the financial sector`s importance to economic growth. This means that Brazil must also improve the legal and regulatory environment in which its financial institutions operate. Brazil is weak in important components of such an environment: The rights of secured and unsecured creditors, the enforcement of contracts, and the sharing of credit information among intermediaries.

Recent reforms, such as the extension of alienacao fiduciaria to housing, the introduction of cedula de credito bancario, the legal separation of principal and interest, and improvements in credit information systems, are useful steps in strengthening the framework. But more is needed. Reforms that will significantly increase the level and efficiency of financial intermediation and have a positive impact on economic growth include:

A more efficient judicial sector and better enforcement of contracts.

Stronger rights for secured and unsecured creditors.

Stronger accounting standards and practices, to improve the quality of information available about borrowers.

The development of a legal and regulatory framework that facilitates the exchange among financial institutions of both negative and positive information about borrowers.

This paper - a product of the Financial Sector Strategy and Policy Department - is part of a larger effort in the department to better understand the link between financial development and economic growth, with application to Brazil.

Abstract:
While the theoretical and empirical finance literature has focused almost exclusively on enterprise credit, about half of credit extended by banks to the private sector in a sample of 45 developing and developed countries is to households. The share of household credit in total credit increases as countries grow richer and financial systems develop. Cross-country regressions, however, suggest a positive and significant impact on gross domestic product per capita growth only of enterprise but not household credit. These two findings together partly explain why previous studies have found a small or insignificant effect of finance on growth in high-income countries. In addition, countries with a lower share of manufacturing, a higher degree of urbanization, and more market-oriented financial systems have a higher share of household credit. It is thus mostly socio-economic trends that determine credit composition, while policies influencing banking market structure and regulatory policies are not robustly related to credit composition.

Access to Finance, Banks & Banking Reform, Economic Theory & Research, Debt Markets

Abstract:
Panel data for 63 countries in 1960-97 reveal no robust relationship between the development of financial intermediaries and the volatility of growth.

Beck, Lundberg, and Majnoni extend the recent literature on the link between financial development and economic volatility by focusing on the channels through which the development of financial intermediaries affects economic volatility. Their theoretical model predicts that well-developed financial intermediaries dampen the effect of real sector shocks on the volatility of growth while magnifying the effect of monetary shocks - suggesting that, overall, financial intermediaries have no unambiguous effect on growth volatility.

The authors test these predictions in a panel data set covering 63 countries over the period 1960-97, using the volatility of terms of trade to proxy for real volatility, and the volatility of inflation to proxy for monetary volatility. They find no robust relationship between the development of financial intermediaries and growth volatility, weak evidence that financial intermediaries dampen the effect of terms of trade volatility, and evidence that financial intermediaries magnify the impact of inflation volatility in low- and middle-income countries.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to understand the links between the financial system and economic growth.

Abstract:
Economies with better developed financial sectors have a comparative advantage in manufacturing industries. A two-sector model shows the sector with large scale economies profiting more than the other from a well-developed financial sector. In countries with higher levels of financial development, manufactured exports represent a higher share of GDP and of merchandise exports - and those countries have a higher trade balance in manufactured goods.

Beck explores a possible link between financial development and trade in manufactures. His theoretical model focuses on the role of financial intermediaries in facilitating large-scale, high-return projects. Results show that economies with better developed financial sectors have a comparative advantage in manufacturing industries.

He provides evidence for this hypothesis, first proposed by Kletzer and Bardhan (1987), using a 30-year panel of data for 65 countries. Controlling for country-specific effects and possible reverse causality, he shows that financial development exerts a large causal impact on the level of both exports and the trade balance of manufactured goods.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to understand the link between financial development and economic growth. The author may be contacted at tbeck@worldbank.org.

Abstract:
Recently, developing countries have witnessed a sharp increase in foreign bank participation. The authors examine the impact on banking outreach using newly gathered data for Mexico, where foreign bank participation rose from 2 percent to 83 percent of assets during 1997-2005. Country-, bank-, and bank-municipality level estimations show a decline in the number of deposit and loan accounts. While country- and bank-level estimations indicate an increase in the share of municipalities with bank branches and in the likelihood of bank presence, bank-municipality regressions show that only rich and urban municipalities benefited. Overall, the evidence is consistent with a decline in outreach.

Banks & Banking Reform, Access to Finance, Debt Markets, Corporate Law

Abstract:
We assess the impact of bank deregulation on the distribution of income in the United States. From the 1970s through the 1990s, most states removed restrictions on intrastate branching, which intensified bank competition and improved bank performance. Exploiting the cross-state, cross-time variation in the timing of branch deregulation, we find that deregulation materially tightened the distribution of income by boosting incomes in the lower part of the income distribution while having little impact on incomes above the median. The results suggest that regulatory impediment to competition among banks during the 20th century were disproportionally harmful to lower income workers.

Financial Institutions, Government Policy and Regulation, Income Inequality

Abstract:
Policymakers and economists disagree about the impact of bank regulations on the distribution of income. Exploiting cross-state and cross-time variation, the authors test whether liberalizing restrictions on intra-state branching in the United States intensified, ameliorated, or had no effect on income distribution. The analysis finds that branch deregulation lowered income inequality by affecting labor market conditions, not by boosting the business income of the poor, nor by enhancing educational attainment. Reductions in the earnings gap between men and women and between skilled and unskilled workers account for the bulk of the explained drop in income inequality.

Emerging Markets, Economic Theory & Research, Inequality, Fiscal & Monetary Policy

Abstract:
Using data for 91 large banks from 45 countries, this paper finds few differences in the extent, type, and pricing of SME loans across foreign, private, and government-owned banks, even though different bank ownership types apply different lending technologies and have different organizational structures. Instead, we find significant differences across banks in developed and developing countries, driven by differences in the economic, institutional, and legal environment, as opposed to by differences in lending technologies and organizational structures. Finally, the link between lending technologies, organizational structures, and SME financing is not consistent with the conventional view that SME lending is based on “relationship lending”.

small and medium enterprises, bank ownership, lending technology, access to finance

Abstract:
We analyze gender differences associated with loan officer performance. Using a unique data set for a commercial bank in Albania over the period 1996 to 2006, we find that loans screened and monitored by female loan officers show a statistically and economically significant lower likelihood to turn problematic than loans handled by male loan officers. This effect comes in addition to a lower risk of female borrowers and cannot be explained by sample selection, experience differences between female and male loan officers, or overconfidence of male loan officers. Our results seem to be driven by differences in monitoring, as loan officers of different gender do not seem to screen borrowers differently based on observable borrower characteristics. This suggests that gender indeed matters in banking.

Behavioral banking, loan officers, gender, loan default, monitoring, screening

Abstract:
While theory predicts different effects of household credit and enterprise credit on the economy, the empirical literature has mainly used aggregate measures of overall bank lending to the private sector. We construct a new dataset from 45 developed and developing countries, decomposing bank lending into lending to enterprises and lending to households and assess the different effects of these two components on real sector outcomes. We find that: 1) Enterprise credit raises economic growth whereas household credit has no effect; 2) enterprise credit reduces income inequality whereas household credit has no effect; and 3) household credit is negatively associated with excess consumption sensitivity, while there is no relationship between enterprise credit and excess consumption sensitivity.

Financial intermediation, Firm credit, Household credit

Abstract:
While theory predicts different effects of household credit and enterprise credit on the economy, the empirical literature has mainly used aggregate measures of overall bank lending to the private sector. We construct a new dataset from 45 developed and developing countries, decomposing bank lending into lending to enterprises and lending to households and assess the different effects of these two components on real sector outcomes. We find that: 1) enterprise credit raises economic growth whereas household credit has no effect; 2) enterprise credit reduces income inequality whereas household credit has no effect; and 3) household credit is negatively associated with excess consumption sensitivity, while there is no relationship between enterprise credit and excess consumption sensitivity.

Financial Intermediation, Household Credit, Firm Credit

Abstract:
This paper explores the relationship between the relative size of the Small and Medium Enterprise (SME) sector, economic growth, and poverty alleviation using a new database on the share of SME labor in the total manufacturing labor force. Using a sample of 45 countries, we find a strong, positive association between the importance of SMEs and GDP per capita growth. The data do not, however, confidently support the conclusions that SMEs exert a causal impact on growth. Furthermore, we find no evidence that SMEs alleviate poverty or decrease income inequality.

Abstract:
In spite of shallow financial markets, Sub-Saharan Africa will not escape the repercussions of the global financial crisis. The global turmoil threatens the progress Sub-Saharan Africa has made in financial sector deepening and broadening over the recent years and underlines the importance of continuing and deepening the necessary institutional reforms. In this context it is important to define the role of government in expanding financial sectors in a sustainable and market-friendly manner. Foreign banks have brought more benefits than risks for their host economies in Sub-Saharan Africa, but are certainly not a panacea and not a substitute for institutional and policy reform. The profile of foreign banks, however, has changed, with more and more regional banks emerging. This trend toward regional integration is promising as it might allow the small African financial system to reap benefits from scale economies, but it also requires regulatory and supervisory improvements and coordination across the region.

Banks & Banking Reform, Debt Markets, Access to Finance, Emerging Markets

Abstract:
Public policy debates and theoretical disputes motivate this paper%u2019s examination of (i) therelationship between bank concentration and banking system fragility and (ii) the mechanismsunderlying this relationship. We find no support for the view that concentration increases thefragility of banks. Rather, banking system concentration is associated with a lower probability thatthe country suffers a systemic banking crisis. In terms of policies, we find that (i) regulations andinstitutions that facilitate competition in banking are associated with less
not more -- bankingsystem fragility and (ii) including these policy indicators does not change the results onconcentration. This suggests that concentration is a proxy for something else besides the competitiveenvironment. Also, we do not find that official capital regulations, reserve requirements, or officialprudential regulations lower crises probabilities. Finally, we present suggestive evidence thatconcentrated banking systems tend to have larger, better-diversified banks, which may help accountfor the positive link between concentration and stability.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
Are market-based or bank-based financial systems better at financing the expansion of industries that depend heavily on external finance, facilitating the formation of new establishments, and improving the efficiency of capital allocation across industries? We find evidence for neither the market-based nor the bank-based hypothesis. While legal system efficiency and overall financial development boost industry growth, new establishment formation, and efficient capital allocation, having a bank-based or market-based system per se does not seem to matter much.

Abstract:
This paper assesses two theories regarding the historical determinants of international differences in financial development. The law and finance theory holds that legal traditions differ in terms of the priority they attach to protecting the rights of private investors vis-a-vis the State and this has important implications for financial development. The endowment theory argues that the disease and geographical environment influence the formation of long-lasting institutions that influence financial development. Using a sample of former colonies, we explore whether the legal system brought by colonizers and/or the initial disease/geographical endowments encountered by colonizers explain financial development today. The empirical results indicate that both the legal systems brought by colonizers and the initial endowments in the colonies are important determinants of stock market development and private property rights protection. However, initial endowments are more robustly associated with financial intermediary development than legal origin and initial endowments explain more of the cross-country variation in financial intermediary and stock market development than legal origin.

Abstract:
Remittances are a sizeable source of external financing for developing countries. In the L’Aquila 2009 G8 Summit, leaders pledged to reduce the cost of remittances by half in 5 years (from 10 to 5 percent). Yet, empirically, little is known about what drives the cost of remittances. Using newly gathered data across 119 country corridors, this paper explores the factors that determine the cost of remittances. Considering average costs across all types of institutions, the authors find that corridors with larger numbers of migrants and more competition among remittances service providers exhibit lower costs. By contrast, remittance costs are higher in richer corridors and in corridors with greater bank participation in the remittances market. Comparing results across all banks and all money transfer operators separately, the analysis finds few significant differences. However, estimations for Western Union, a leading player in the remittances business, suggest that this firm’s prices are insensitive to competition.

Population Policies, Remittances, Access to Finance, Debt Markets, Economic Theory & Research

Abstract:
Which commercial bank supervisory policies ease
or intensify
the degree to which bank corruption is an obstacle to firms raising external finance? Based on new data from more than 2,500 firms across 37 countries, this paper provides the first empirical assessment of the impact of different bank supervisory policies on firms’ financing obstacles. We find that the traditional approach to bank supervision, which involves empowering official supervisory agencies to directly monitor, discipline, and influence banks, does not improve the integrity of bank lending. Rather, we find that a supervisory strategy that focuses on empowering private monitoring of banks by forcing banks to disclose accurate information to the private sector tends to lower the degree to which corruption of bank officials is an obstacle to firms raising external finance. In extensions, we find that regulations that empower private monitoring exert a particularly beneficial effect on the integrity of bank lending in countries with sound legal institutions.

Abstract:
By studying intrastate branch banking reform in the United States, this paper provides evidence that financial markets substantively influence the distribution of income. From the 1970s through the 1990s, most states removed restrictions on intrastate branching, which intensified bank competition and improved efficiency. Exploiting the cross-state, cross-time variation in the timing of bank deregulation, we evaluate the impact of liberalizing intrastate branching restrictions on the distribution of income. We find that branch deregulation significantly reduced income inequality by boosting the incomes of lower income workers. The reduction in income inequality is fully accounted for by a reduction in earnings inequality among salaried workers.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
Market imperfections, such as those caused by underdeveloped financial and legal systems, are usually considered constraints on a firm's ability to obtain capital.A past study has shown that firms in countries with developed financial institutions and efficient legal systems obtain capital more easily than in countries with less developed ones.That study, though, is based only on the largest firms in each economy studied. The present research proposes to consider the effects of financial, legal, and corruption problems on firm size. Data are taken from a size-stratified survey of over 4,000 firms in 54 countries.The questions sought to identify obstacles to firm performance and growth internationally. The World Business Environment Survey is used to identify the level of financing, legal and corruption obstacles in each country.An attempt is made to determine: (1) whether firm growth is affected by financial and legal imperfections and corruption, (2) whether such constraints affect firms depending on their size, (3) whether firms characterized as small, medium or large are affected differently in nations with different levels of financial and institutional development; (4) what characteristics of legal systems can improve firm growth, and (5) the effects of corruption among financial intermediaries. It was determined that the smallest firms are consistently the most constrained.Financial and institutional development diminishes the effects of financial, legal, and corruption constraints, and small firms experience the greatest benefit.Also indicated was that the relation between quality of the legal system and firm growth is weak. Corruption of bank officials is shown to constrain growth. Policy implications are also considered.. (TNM)

Financial regulations, Regulations, Legal systems, Corruption in government, Experimental/primary research, World Business Environment Survey, Banking industry, Firm size, Regulations, Firm growth

Abstract:
We analyze gender differences associated with loan officer performance. Using a unique data set for a commercial bank in Albania over the period 1996 to 2006, we find that loans screened and monitored by female loan officers show statistically and economically significant lower default rates than loans handled by male loan officers. This effect comes in addition to a lower default rate of female borrowers and cannot be explained by sample selection, overconfidence of male loan officers or experience differences between female and male loan officers. Our results seem to be driven by differences in monitoring, as loan officers of different gender do not seem to screen borrowers differently based on observable borrower characteristics. This suggests that gender indeed matters in banking.

Behavioral banking, gender, loan default, loan officers, monitoring, screening

Abstract:
In many developing countries less than half the population has access to formal financial services, and in most of Africa less than one in five households has access. Lack of access to finance is often the critical mechanism for generating persistent income inequality, as well as slower economic growth. Hence expanding access remains an important challenge across the world, leaving much for governments to do. However, not all government actions are equally effective and some policies can even be counterproductive. This paper sets out principles for effective government policy on broadening access, drawing on the available evidence and illustrating with examples. The paper concludes with directions for future research.

D31, G20, G21, O12, O16

Abstract:
Recent data compilations show that many poor and nonpoor people in many developing countries face a high degree of financial exclusion and high barriers in access to finance. Theory and empirical evidence point to the critical role that improved access to finance has in promoting growth and reducing income inequality. An extensive literature shows the channels through which finance promotes enterprise growth and improves aggregate resource allocation. There is less evidence at the household level, however, and on the effectiveness of policies to overcome financial exclusion. The article summarizes recent efforts to measure and analyze the impact of access to finance and discusses the unfinished research agenda.

G2, G21, O16

Abstract:
This paper examines legal theories of international differences in financial development. The law and finance theory stresses that legal traditions differ in terms of (i) their emphasis on the rights of private property owners vis-à-vis the state and (ii) their ability to adapt to changing commercial and financial conditions, so that historically determined legal traditions shape financial development today. Other theories reject the centrality of legal tradition in accounting for cross-country differences in financial development. The results are broadly consistent with legal theories of financial development, though it is difficult to identify the precise channel through which legal tradition influences financial development.

Abstract:
This paper evaluates the empirical relationship between the level of financial intermediary development and (i) economic growth, (ii) total factor productivity growth, (iii) physical capital accumulation, and (iv) private saving rates. We use (a) a pure cross-country instrumental variable estimator to extract the exogenous component of financial intermediary development, and (b) a new panel technique that controls for biases associated to simultaneity and unobserved country-specific effects. After controlling for these potential biases, we find that (1) financial intermediaries exert a large, positive impact on total factor productivity growth, which feeds through to overall GDP growth; and (2) the long-run links between financial intermediary development and both physical capital growth and private saving rates are tenuous.

Growth, Financial Intermediation