Financial services and economic development

Transcription

1 GDP per capita growth 03/11/2014 Financial services and economic development Thorsten Beck Finance why do we care? 0.04 BWA COG SLE ALB GAB IND KOR TUR SGP MUS SDN MOZ IRLLUX IDN MAR EGY PAK TUN FIN GBR PRT SWZ MLT ESP MYS ISLSO CHL CYP HKG MLI AUT FRA DNK COLDEU IRN NPL LVA ITA LKAISR EST BHR NOR CRI GMB SWE SYR BEL GRC ARG URYSLV BGR NLD BGD BEN JPN MRT MEX DZA RWATTO PNG BLZ CAN PAN JAMGTM PER SEN HND JOR ROM VEN AUSBRB ECU USA GUY ZAF GHA MWI HUN CHE BDI KENBOL ZMB CMR NZL NER SAU CAF PRY FJI PHL BRN CIV TGO THA BRA Private Credit to GDP 1

2 Growth in headcount 03/11/2014 Finance why do we care? MNG UGA ALB YEM ROM LAO RWA ZMB GHA PER TTO NER BOL PRY POL BGR MLI CIV TUR BDI HRV LSO ECUBGD NGA MDG BWA COL ZWE VEN NIC SLV ETH EGY BRA NPL LKA PHL BFA DZA HND MRT GTM HUN MEX PAK URY MWI DOM MAR SEN IDN KEN GMB CMR CRI SVN IRN JAM VNM ZAF PAN TUN CHL THA GUY MYS MKD Private Credit to GDP Financial intermediation and growth Finance is pro-growth and pro-poor Provides payment infrastructure for real economy Intermediates savings from savers to private and public sector Allocation function is critical! Impact through productivity growth and reallocation of capital more important than through capital accumulation More firm entry and firm growth to optimal size More innovation and better capture of growth opportunities Positive impact through governance Pro-poor effects through indirect channels, including labor market, migration etc. Important non-linearities: effect strongest for middleincome countries; effect more through enterprise than household credit 2

3 The dark side of finance Fragility is at core of intermediation function Risks both on funding (bank run, market freeze) and asset side (agency problems) Opacity of banks balance sheets Free-rider problem undermines market discipline Externalities of bank failure for rest of financial system and real economy Domino, hostage, fridge problems Externalities of bank failure lead to establishment of (implicit or explicit) financial safety net (subsidy) with disastrous repercussions for society Output losses relative to potential output; Source: Laeven and Valencia (2010) 3

4 What role for financial globalization? Different modes Cross-border equity investment (direct, portfolio etc.) Cross-border lending (to banks, to customers) Foreign direct investment by financial institutions Access to financial services in other countries Focus on foreign bank entry To which extent can foreign banks contribute to financial deepening and economic growth/poverty reduction through the channels outlined above? To which extent can cross-border banking undermine stability? Domestic vs. foreign banks the theory Foreign banks can bring New resources (especially after crisis) Bring more competition (but not always) Help upgrade technology and regulatory standards Thus ultimately help deepen financial systems but can also Increase volatility Cherry pick clients and crowd out banks that serve low-end clients Thus increase shallowness and fragility 4

5 But what about reality? Stability mixed - mitigating against local real-sector shocks, but can propagate home-country shocks Efficiency mostly positive, unless in non-competitive environment Benefits contingent on contractual and information framework in economy, competition etc. Access ambiguous results, with important regional variation Central/Eastern Europe overall positive effect, helped build up financial markets, served as macroeconomic disciplining tool Latin America mixed consider Mexico Africa hampered by other constraints Critical differences according to size of subsidiary/branch Cross-border banking is changing face, with regional banks gaining importance Important stability concerns Failure of cross-border bank imposes costs on foreign stakeholders that are not taken into account by home country supervisor; too lenient approach vis-à-vis global banks Contagion effects through common asset exposures, fire sale externalities, informational contagion, interbank exposures etc. Within-in monetary union: additional externalities Close link between monetary and financial stability Lack of exchange rate tool exacerbates impact of asymmetric shocks Common lender of last resort leads to tragedy of commons problem, as in Eurozone Regulatory arbitrage possible 5

6 Summary Finance is critical for modern market economies and economic growth How to harness the best of financial globalization while minimizing risks? Competition, diversification, infrastructure as necessary conditions for reaping benefits of crossborder banking Sound and effective supervision and resolution framework on national level Better supra-national framework needed for regulation and resolution of cross-border banks Example: banking union in Europe as first step into right directions Example: Living wills for G-SIFIs Thank you Thorsten Beck 6