Financial intermediation costs in low income countries: The role of regulatory,institutional, and macroeconomic factors

We analyze factors driving persistently higher financial intermediation costs in low-income countries (LICs) relative to emerging market (EM) country comparators. Using the net interest margin as a proxy for financial intermediation costs at the bank level, we find that within LICs a substantial part of the variation in interest margins can be explained by bank-specific factors: margins tend to increase with higher riskiness of credit portfolio, lower bank capitalization (or lower risk aversion), and smaller bank size. Overall, we find that concentrated market structures and lack of competition in LICs banking systems and institutional weaknesses constitute the key impediments preventing financial intermediation costs from declining. Our results provide strong evidence that policies aimed at fostering banking competition and strengthening institutional frameworks can reduce intermediation costs in LICs.     

Identifying credit demand,financial intermediation,and supply of funds shocks: A structural VAR approach

In this paper, we identify three exogenous shocks to credit market: demand for credit, supply of funds into the financial system, and the willingness to lend of financial institutions (financial intermediation), and also, determine the contribution of these shocks to fluctuations in the credit market and overall economic activity. We estimate a structural vector autoregression model where the three credit shocks are identified with a set of sign restrictions motivated by a simple partial equilibrium model of financial intermediation. We find that the credit demand shock explains significantly the variations in the long-term loan rate proxied by the Moody’s Baa corporate bond yield, while the supply of funds shock contributes to most of the fluctuations in the short-term commercial paper rate. The financial intermediation shock drives most of the fluctuations in the quantity of loans as well as the spread between the Baa and commercial paper rates. Of the credit shocks, we find that the financial intermediation shock has the largest impact on real economic activity. In fact, our analysis implies that the sharp decline in output during the 2007–2009 financial crisis is largely attributable to the financial intermediation shock, along with shocks originating outside of the financial system.     

Trade through endogenous intermediaries

We propose an intermediation core for an economy that explicitly specifies how traders organize themselves into trade cooperatives (intermediaries) and how trade between them gets carried out. The intermediation core allocations are closely related to the equilibrium allocations of a non-cooperative intermediation game in Townsend (1983). We show that the intermediation core contains all subgame perfect equilibrium allocations of the intermediation game, similar to the inclusion of competitive equilibrium allocations in the core usually studied. We identify intermediation core allocations that are also subgame perfect equilibrium allocations of the intermediation game in terms of the supporting intermediary structures. These results help to characterize subgame perfect equilibrium allocations of the intermediation game and to analyze their welfare and stability properties.     

Monitoring costs and trade credit

This paper addresses the question of why nonfinancial firms engage in lending to their business partners. Such lending or trade credit is modeled as a second layer of financial intermediation. It is shown that when it is costly for a bank to inspect the borrower’s revenue but not for the borrower’s business partner, then saving in monitoring costs due to the business partner’s informational advantage may lead to trade credit. The trade off is between monitoring fewer firms and monitoring larger firms that may entail an adverse scale effect. The results are consistent with the existing empirical evidence on bankruptcy costs and on the incidence of trade credit. Welfare analysis in terms of total surplus shows that the equilibrium lending arrangement is not necessarily optimal.     

Financial intermediation and real estate prices impact on business cycles: A Bayesian analysis

How do financial intermediation and real estate prices impinge on the business cycle? I develop a two-sector stochastic general equilibrium model with financial intermediation and real estate collateral to assess the impact of financial conditions and land prices on aggregate fluctuations. I estimate the model with Bayesian methods using a novel data set that includes U.S. macro and financial variables during the period 1975–2010. The results from the estimated model show that financial conditions have a sizable effect on the variability of investment spending, while productivity shocks are the main source of consumption fluctuations. Specifically, on the macro side, (1) financial shocks explain about three quarters of investment spending variability and one third of the variance in hours worked. On the financial side, (2) financial shocks explain most of the variability in land prices, credit spread, and aggregate net worth of the financial sector. The model also accounts for observed unconditional moments of macro and financial variables. Our quantitative results are suggestive of the impact of diverse sources of financial instability, and as such relevant for macro prudential policy analysis.     

The impact of credit and fiscal policy under a liquidity trap

This study examines the interaction of non-conventional credit policy and fiscal policy when adverse financial conditions drive the economy to a deep contraction and conventional monetary policy becomes ineffective as the policy interest rate reaches its effective lower bound. Consistent with other studies, under counter-cyclical financial intermediation costs, credit easing policies aimed at reducing credit spread ameliorate the response of the economy and lead to a faster recovery. More importantly, I find that expansionary fiscal policy during an episode of liquidity trap is associated with a large multiplier effect that prevents an otherwise deeper and longer recession. Moreover, the large impact of expansionary fiscal policy is maintained even if credit policy is already in place.     

Efficiency of insurance firms with endogenous risk management and financial intermediation activities

Risk management is now present in many economic sectors. However, none of existing studies consider risk management as a potential determinant of firm performance. In this paper, we investigate the role of risk management and financial intermediation in creating value for financial institutions by analyzing U.S. property-liability insurers. Our main goal is to test how risk management and financial intermediation activities create value for insurers by enhancing economic efficiency through cost reductions. We consider these two activities as intermediate outputs and estimate their shadow prices. Insurer cost efficiency is measured using an econometric cost function. The econometric results show that both activities significantly increase the efficiency of the property-liability insurance industry.     

Bank capital regulation,loan contracts,and corporate investment

This paper studies the link between bank capital regulation, bank loan contracts and the allocation of corporate resources across firms’ different business lines. Credit risk is lower when firms write contracts that oblige them to invest mainly into projects with highly tangible assets. We argue that firms have an incentive to choose a contract with overly safe and thus inefficient investments when intermediation costs are increasing in banks’ capital-to-asset ratio. Imposing minimum capital adequacy for banks can eliminate this incentive by putting a lower bound on financing costs.     

融资约束、代理成本与企业研发效率——基于中国工业上市公司的实证研究

本文以2004~2012年我国工业上市公司中已披露研发费用的企业为样本,采用随机前沿分析方法研究融资约束和代理成本对企业研发效率的影响,主要得出以下结论:融资约束对企业研发效率有显著的正向影响;而代理成本与企业研发效率之间呈现出显著的负向关系;企业的融资约束可以缓解代理成本对企业研发效率的负向作用。此外,本文的实证结果还表明,国有控股企业的研发效率低于非国有控股企业的研发效率,而且企业研发并没有随着研发强度的提高而产生规模效应。     

Intermediation Can Replace Certification

We consider a market in which consumers do not have perfect information about product quality. Producers can perfectly reveal that a good is of high quality through certification, which entails socially wasteful costs. Firms can choose whether to sell through an intermediary or to sell independently (vertical integration). We show that multibrand retailing, which leads to a redistribution of profits but not to social costs, can fully or partially replace certification by signaling product quality. Renting the image of a competing high-quality brand is shown to be an outcome that can be sustained through intermediation.     

MODELS OF BANKING INSTABILITY: A PARTIAL REVIEW OF THE LITERATURE

Abstract. This paper critically examines the theoretical literature on banking instability that has followed Diamond and Dybvig (1983). It explores the extent to which it (a) explains banking instability within a theoretical context in which financial intermediaries improve on unintermediated markets, and (b) justifies government involvement in the financial intermediation industry. It suggests that the literature has yet to provide a satisfactory theoretical basis for banking instability as such since the intermediaries which arise from it are peculiar mutual funds that bear little resemblance to real-world banks. In addition, the paper challenges the widespread belief that this literature provides a sound foundation for government involvement in the industry. It suggests that arguments for government intervention are open to objection on various grounds, the most important one being that they are inconsistent with the existence of properly motivated financial intermediation in these models.     

The Determinants of Trade Credit in Transition Countries

The paper investigates the determinants of trade credit in transition countries. Traditional theories of trade credit extension suggest that both financial and commercial motives may induce non-financial companies to assume a role of financial intermediation. Furthermore, specific conditions of financing for companies in transition countries may reserve to trade credit an important role in financial structure. We test the determinants of accounts receivable and accounts payable on a sample of about 9300 companies from nine Central and Eastern European Countries. Results suggest that both financial and commercial motives explain the credit behaviour of firms. However, we do not find generalised patterns in the use of trade credit among all transition countries.     

Financial intermediation in an overlapping generations model with transaction costs

We analyze an overlapping generations economy where agents interact to share liquidity risk. We show that a pure exchange economy has excessive trade in equilibrium because agents interact to rebalance their portfolios. Intergenerational financial intermediaries reduce the number of interactions because agents only transact when they face liquidity needs. In the absence of asset risk, intermediaries match redemptions with deposits and dividends, and never sell assets. If the economy is subject to transaction costs, the intermediated economy can sustain higher stationary investment and welfare. We also find that dead weight transaction costs can increase welfare because it protects banks from interbank arbitrage and dampens the inherent cyclicality of market economies.     

Entry deterrence under financial intermediation with private information and hidden contracts

We study how financial intermediation affects market entry when an incumbent monopolist enters into non-public, short-term contracts for outside funds. Financial intermediation serves as a commitment device to avoid costly signalling, but at the same time leads to strategic experimentation by the bank. Without public commitment to the financial contract, signal-jamming affects the bank's strategic experiment. Unlike the previous literature on signalling and signal-jamming in entry deterrence in which entry is unaffected or its change indeterminate, the altered strategic experiment has the effect of increasing the amount of entry to the market. Received: 19 January 2004, Accepted: 18 May 2005 JEL Classification: C73, D8, L1 We thank Markus Daniel, Spiros Bougheas, James Peck, Tony Creane, two anonymous referees, the associate editor and seminar participants at the Wissenschaftszentrum Berlin, Emory, Ohio State, and Royal Holloway Universities and the Universities of Wisconsin, Nottingham and East Anglia, as well as Matt Jackson for editorial assistance.     

Policy Shocks, Market Intermediaries, and Corporate Strategy: The Evolution of Business Groups in Chile and India

Numerous countries have undergone rapid transitions in their economic environments. Yet, little is known about firms' responses to such transitions. We use field-collected data to study the evolution of eighteen large and diversified business groups in Chile (1987–1997) and India (1990–1997). The chosen periods correspond to significant deregulation in the primary markets in both countries. Conventional wisdom suggests that the intermediation roles played by business groups ought to decrease during these periods. However, we find an increase in group scope, an increase in the strength of the social and economic ties that bind together group firms, an increase in self-reported intermediation attempts by the groups, and some evidence that these actions are associated with improvements in accounting and stock-market performance of the group affiliates. We suggest that the slow development of market intermediaries, in a manner suggested by institutional economics, and the attendant lack of reduction in transaction costs in primary markets, can explain these findings.     

Entrepreneurial orientation,intermediation services,microfinance, and microenterprises

This study was conducted to examine the influence of intermediation services on microfinance‐supported microenterprises. Information was collected by using a structured pretested questionnaire from a random section of 366 respondents (from 366 enterprises) from 2 Indian states. Econometric models were used to test the hypotheses, and reliability and validity testing and data analysis were also performed. It was noticed that proactiveness and risk‐taking ability of microenterprises were enhanced when intermediaries emphasize more on the business development services, financial intermediation services, and social intermediation services. Intermediation services of intermediaries impacted on entrepreneurial orientation of microenterprises where networking of microentrepreneurs positively moderated the relationship.     

Shadow Banking,Chinese Style

Shadow banks are broadly defined as entities which conduct credit intermediation outside the formal banking system. Poorly regulated, engaging in opaque forms of intermediation, deeply interconnected with the official banking system, and operating with implicit government guarantees, they pose a major source of systemic risk. Yet shadow banks provide an important service by channeling credit to excluded investors, and can complement the formal banking sector. What explains the rapid proliferation of shadow banks in China? How large are they and what forms do they take? What types of risks do they pose to the financial system? And how best can China utilise the services of shadow banks while at the same time ensuring that they do not create systemic risks for the financial system?     

What drives the banks' diversification decision? A dynamic nonlinear panel data approach

This paper empirically determines the drivers of functional diversification decision for 365 banks set in selected Middle East and North Africa (MENA) countries over 1988–2015. For this purpose, we use a dynamic nonlinear panel data model. Our findings reveal that both market share and financial intermediation stratify the diversification decision for the whole MENA sample. Splitting the sample shows that the risk‐adjusted profitability and the loan loss provision ratio exert a major influence over the diversification indicator for Gulf Cooperation Council (GCC) banks, whereas the net interest margin ratio, the bank market share, and financial intermediation are the major drivers of the strategic decision for the remaining non‐GCC banks.     

Intermediation in Search Markets

In markets, in which exchange requires costly search for trading partners, intermediaries can help to reduce the trading frictions. This intuition is modeled in a framework with heterogeneous agents, who have the choice between intermediated exchange and search accompanied by some bargaining procedure. The equilibria of such a game are characterized. In the case of a monopolistic intermediary, the tradeoff between the bid-ask spread and the costs of delay during private search determine the intermediary's clientele. In equilibrium the monopolist charges a positive spread. Traders with large gains from trade prefer to deal with him, whereas traders with relatively low gains from trade engage in search. In case of competition among intermediaries, the classical Bertrand result obtains, and bid and ask prices converge to the (unique) Walrasian equilibrium price. Thus, in the confines of the model, the Walrasian auctioneer of the market under consideration can be replaced by competing intermediaries. In addition a multiplicity of subgame perfect Nash equilibria emphasizes the coordination problems inherent in models of intermediation.     

A functional perspective on financial networks

The financial sector is a critical component of any economic system, as it delivers key qualitative asset transformation services in terms of liquidity, maturity and volume. Although these functions could in principle be carried out separately by specialized actors, in the end it is their systemic co-evolution that determines how the aggregate economy performs and withstands disruptions. In this paper we argue that a functional perspective on financial intermediation can be usefully employed to investigate the functioning of financial networks. We do this in two steps. First, we use previously unreleased data to show that focusing on the economic functions performed over time by the different institutions exchanging funds in an interbank market can be informative, even if the underlying topological structure of their relations remains constant. Second, a set of alternative artificial histories are generated and stress-tested by using real data as a calibration base, with the aim of performing counterfactual welfare comparisons among different topological structures.