Financial Markets and Economic Growth

The current economic problems in Southeast Asia can be attributed not to too much reliance on financial markets, but to too little . Like the U.S. economy a century ago, the emerging Asian economies do not have welldeveloped capital markets and so remain heavily dependent on their banking systems to finance growth.
For all its benefits, banking is "not only basically 19th-century technology, but disaster-prone technology." The extreme maturity (and, in some cases, currency) mismatch on banks' balance sheets plus the first-come, first-served nature of the deposit obligations mean that banks are inherently vulnerable to massive runs by depositors—and that their economies are subjected to periodic credit crunches. And, as the author says, "in the summer of 1997 a banking-driven disaster struck in East Asia, just as it had struck so many times before in U.S. history."
In this century, In this century, the U.S. economy has steadily reduced its dependence on banks by developing "dispersed and decentralized" financial markets. In so doing, it has increased the efficiency of the U.S. capital allocation process and reduced its susceptibility to the credit crunches that have occurred throughout U.S. history. By contrast, Japan has not reduced its economy's dependence on banks, and its efforts to deal with its banking problems have served only to destabilize itself as well as its neighbors. Developing countries in Southeast Asia and elsewhere are urged not to follow the Japanese example, but to take measures aimed at developing financial markets and institutions that will either substitute for or complement bank products and services.     

A Look Back at Merton Miller's “Financial Markets and Economic Growth”

The author begins by agreeing with Miller's characterization of the fragility of U.S. banks and of the shortcomings of the Asian model of bank finance‐driven growth. The article also expresses “emphatic agreement” with Miller's arguments that the protection of banks through deposit insurance, regulatory forbearance, and other forms of “bailout” have created costly moral‐hazard problems that encourage excessive risk‐taking. And the author endorses, at least in principle, Miller's main argument that the development of capital markets that do not require the direct involvement of banks should make economies if not less prone to financial crises, then at least more resilient in recovering from them. But having acknowledged the limitations of bank‐centered systems and the value of developing non‐bank alternatives for savers and corporate borrowers, the author goes on to point to the surprising durability of some banking systems outside the U.S.—notably Canada's, which has not experienced major problems since the 1830s. And even more important, the author views banks and capital markets not as “substitutes” for one another, but as mutually dependent “complements” whose interdependencies and interactions must be recognized by market participants and regulators alike.     

Dependence patterns among Asian banking sector stocks: A copula approach

Asian banks have recorded 22 banking crisis between 1945 and 2008 and its total share of years in a banking crisis since 1945 is 12.4%, the highest compared to all regions. Interestingly, most of the financial institutions in the region remained largely unscathed during the recent global financial crisis, mainly due to their strong liquidity and capital buffers. Yet, given the episodes of past crisis, the rapid increase in regional corporations and cross-border flows in the region, as well as the paramount importance of the banking sector in the Asian region, it is interesting to study how the banking sectors in the various economies co-move with each other. Against this backdrop, we examine the dependence structure between banking sectors in the region using copula functions. Several findings are documented. First, average dependence generally remain at moderate levels, though dependence between the banking sectors of the developed Asian markets are relatively higher than the emerging markets. Second, we find evidence of asymmetric dependence, suggesting that banking sector returns co-movement varies in bearish and bullish markets. Third, our results show a mild increase in the bivariate dynamic correlations during crisis periods, indicating very limited risk of contagion. Our results provide significant implications for portfolio managers and policymakers.     

The impact of state ownership on performance differences in privately-owned versus state-owned banks: An international comparison

This paper examines how government ownership and government involvement in a country’s banking system affect bank performance from 1989 through 2004. Our study uncovers an interesting pattern of changing performance differences between state-owned and privately-owned banks around the Asian financial crisis. We find that state-owned banks operated less profitably, held less core capital, and had greater credit risk than privately-owned banks prior to 2001, and the performance differences are more significant in those countries with greater government involvement and political corruption in the banking system. In addition, from 1997 to 2000, the 4-year period after the beginning of the Asian financial crisis, the deterioration in the cash flow returns, core capital, and credit quality of state-owned banks was significantly greater than that of privately-owned banks, especially for the countries that were hardest hit by the Asian crisis. However, state-owned banks closed the gap with privately-owned banks on cash flow returns, core capital, and nonperforming loans in the post-crisis period of 2001–2004. Our findings can best be explained by Shleifer and Vishny’s [Shleifer, A., Vishny, R.W., 1997. A survey of corporate governance. J. Finance 52, 737–783] corporate governance theory on state ownership of firms and Kane’s [Kane, E.J., 2000. Capital movement, banking insolvency, and silent runs in the Asian financial crisis. Pacific-Basin Finance J. 8, 153–175] life-cycle model of a regulation-induced banking crisis.     

INTERNATIONAL CORPORATE DIFFERENCES: MARKETS OR LAW?

Current differences in international corporate ownership and governance systems reflect primarily differences in the efficiency of capital markets, not differences in corporate law. Law is an output of this process, not an input. In countries where financial markets are more efficient, there is both less law and greater investor protection. Unlike nations in Asia and most of Europe, the U.S. and the U.K. have large and efficient capital markets, with no restrictions on cross-border capital flows. It is thus notsurprising that when American and English banks, mutual funds, and insurers are allowed by law to increase the concentration of their holdings, they don't do so. With efficient markets, there is no money to be made by holding undiversified blocks in public corporations. If public markets were inefficient, entrepreneurs would arrange for large blocks of stock (or take companies private), just as they grant powers of control to venture capitalists. The effect of law on corporate governance and ownership is far less pronounced in America than in Europe and Japan. Restrictions on U.S. banks aside, corporate law in the United States is “enabling”–that is, it lets people do largely what they want in organizing, managing, and financing the firm. Corporate law in Europe and Japan is much more “directory.” And there is a straightforward explanation for this difference: When capital markets are efficient, the valuation process works better, which in turn provides investors with stronger assurances of fairness. When markets are less efficient, some substitute must be found–law, perhaps, or the valuation procedures of banks. Thus, banks play larger corporate governance roles in nations with less extensive capital markets–and corporate law, as the European Union's company directives show, is more restrictive. European corporate law is today about as meddlesome and directory as U.S. law in the late 19th century, before U.S. capital markets became efficient.     

Shadow Banking,Risk Transfer,and Financial Stability

Shadow banking is the process by which banks raise funds from and transfer risks to entities outside the traditional commercial banking system. Many observers blamed the sudden expansion in 2007 of U.S. sub‐prime mortgage market disruptions into a global financial crisis on a “liquidity run” that originated in the shadow banking system and spread to commercial banks. In response, national and international regulators have called for tighter and new regulations on shadow banking products and participants. Preferring the term “market‐based finance” to the term “shadow banking,” the authors explore the primary financial instruments and participants that comprise the shadow banking system. The authors review the 2007–2009 period and explain how runs on shadow banks resulted in a liquidity crisis that spilled over to commercial banks, but also emphasize that the economic purpose of shadow banking is to enable commercial banks to raise funds from and transfer risks to non‐bank institutions. In that sense, the shadow banking system is a shock absorber for risks that arise within the commercial banking system and are transferred to a more diverse pool of non‐bank capital instead of remaining concentrated among commercial banks. The article also reviews post‐crisis regulatory initiatives aimed at shadow banking and concludes that most such regulations could result in a less stable financial system to the extent that higher regulatory costs on shadow banks like insurance companies and asset managers could discourage them from participating in shadow banking. And the net effect of this regulation, by limiting the amount of market‐based capital available for non‐bank risk transfer, may well be to increase the concentrations of risk in the banking and overall financial system.     

Financial Flexibility,Bank Capital Flows,and Asset Prices

In our parsimonious general‐equilibrium model of banking and asset pricing, intermediaries have the expertise to monitor and reallocate capital. We study financial development, intraeconomy capital flows, the size of the banking sector, the value of intermediation, expected market returns, and the risk of bank crashes. Asset pricing implications include: a market's dividend yield is related to its financial flexibility, and capital flows should be important in explaining expected returns and the risk of bank crashes. Our predictions are broadly consistent with the aggregate behavior of U.S. capital markets since 1950.     

Capital Commitment and Illiquidity in Corporate Bonds

We study trading costs and dealer behavior in U.S. corporate bond markets from 2006 to 2016. Despite a temporary spike during the financial crisis, average trade execution costs have not increased notably over time. However, dealer capital commitment, turnover, block trade frequency, and average trade size decreased during the financial crisis and thereafter. These declines are attributable to bank‐affiliated dealers, as nonbank dealers have increased their market commitment. Our evidence indicates that liquidity provision in the corporate bond markets is evolving away from the commitment of bank‐affiliated dealer capital to absorb customer imbalances, and that postcrisis banking regulations likely contribute.     

Will the U.S. bank recapitalization succeed? Eight lessons from Japan

During the financial crisis that started in 2007, the U.S. government has used a variety of tools to try to rehabilitate the U.S. banking industry. Many of those strategies were also used in Japan to combat its banking problems in the 1990s. There are also a surprising number of other similarities between the current U.S. crisis and the recent Japanese crisis. The Japanese policies were only partially successful in recapitalizing the banks until the economy finally started to recover in 2003. From these unsuccessful attempts, we derive eight lessons. In light of these eight lessons, we assess the policies the U.S. has pursued. The U.S. has ignored three of the lessons and it is too early to evaluate the U.S. policies with respect to four of the others. So far, the U.S. has avoided Japan's problem of having impaired banks prop up zombie firms.     

GLOBALIZATION OF CAPITAL MARKETS AND THE ASIAN FINANCIAL CRISIS

This article has three basic aims: (1) to analyze the impact of the opening of their capital markets on the economies of host countries; (2) to investigate the causes of the Asian financial crisis; and (3) to evaluate the likely effects of the South Korean government's recent attempts to restructure its corporate sector. Although the recent Asian financial crisis has led some to question the merits of open capital markets and to call for regulatory restraints on capital flows across international borders, the scientific evidence suggests that the opening of stock markets to foreign investors has been largely beneficial for emerging economies. On average, stock market liberalization has been accompanied by increases in stock prices and reductions in stock return volatility, reductions in inflation, and reductions in the rate of currency depreciation. Much of the blame for the Asian currency crises is assigned to Asian policymakers' futile attempts to defy market forces by trying to maintain their currencies at artificially high levels. But a more fundamental cause of Asia's economic problems has been the widespread value destruction by Asian corporations, which has led to a lower value for the overall economy and weakened the banking sector. The government-directed banking systems and weak corporate governance structures (including managerial incentives to increase size and market share at the expense of shareholders) that characterize most Asian economies have resulted in systematic overinvestment, bloated payrolls, and sharp declines in corporate profitability. While applauding most of the Korean government's recent measures to reform the economy, the article expresses skepticism about the government-mandated restructuring of the chaebol known as the “big deal.” Rather than trying to direct the process of restructuring, Korean policymakers should limit their efforts to improving the market mechanism by increasing competition in the markets for capital, corporate control, and goods and services. The Korean market for corporate control transactions could be greatly improved by increasing the efficiency of bankruptcy proceedings and by allowing hostile takeovers by foreign as well as domestic investors. To increase the productivity of capital, Asian companies should seek to realign managerial with shareholder interests by tying compensation to measures of value creation like EVA.     

How to Promote Fed Independence: Perspectives from Political Economy and History

In two short histories of the independence of the U.S. Federal Reserve Bank since its creation in 1913—the first with respect to the Fed's monetary policymaking, the second focused on its regulatory policymaking—the author shows that the range of the Fed's powers has varied greatly over time, and that changes in those powers have had major effects on the extent of Fed independence. Moreover, the shifts over time in Fed powers reflect, to a significant degree, conscious trade‐offs by Fed leaders. A large number of somewhat surprising Fed positions on important regulatory matters can be explained as more or less deliberate attempts to preserve the Fed's monetary powers from political interference by yielding some of its independence in exercising its regulatory authority. In a case involving one of the most destructive U.S. financial regulatory policies, the Fed's effective neutrality on, and thus failure to support, the elimination of restrictions on interstate branch banking is seen as contributing to the chronic instability of the U.S. banking system, which has suffered some 20 major crises since the early 1800s (as compared to the crisis‐free Canadian system, with its nationwide banking from its inception). The Fed's reluctance to intervene is attributed to its unwillingness to antagonize powerful Congressional supporters of state banking interests and, more generally, to a “game of bank bargains” that can be seen at work in the political economy of virtually all countries. In more recent times, the most costly episode in this time‐honored game features a series of implicit or, in some cases, explicit agreements between large U.S. banks and urban activist groups—under the aegis of the Community Reinvestment Act, and with the oversight and implicit blessing of the Fed—to make on the order of $4.6 trillion loans to “subprime” borrowers in exchange for the activists’ (and the Fed's) support in Congressional merger hearings. The resulting nationwide debasement of mortgage underwriting standards and sheer volume of “toxic assets,” in combination with clearly inadequate capital requirements (which the Fed also failed to correct), are viewed as if not the principal cause of the crisis, a far bigger contributor than, say, the Fed's widely criticized unwillingness to tighten monetary policy in the early 2000s. To prevent the Fed from continuing to sacrifice its independence in regulatory matters to preserve its freedom to conduct monetary policy, the author proposes that authority for regulatory and monetary policy be vested in two separate regulatory bodies. If carried out, such a policy change would enact a proposal made by then Treasury Secretary Hank Paulson in 2008, just before the global financial crisis hit.     

SECURITIZATION: A FINANCING STRATEGY FOR EMERGING MARKETS FIRMS

With emerging markets now in crisis, companies in developing countries are finding it difficult to obtain financing. Securitization, a transaction structure in which the securities sold to investors are backed by a company's receivables, is one of the few vehicles with at least the potential to provide financing at economic rates in the current environment of uncertainty.
Unlike U.S. securitization issues, emerging markets transactions often use a structure known as "future flows" securitization, in which the securities are backed by receivables that are not expected to be generated until after issuance. This article begins by describing how the process of future flows securitization carves out securities with levels of political risk acceptable to foreign capital market investors. Then it traces the history of emerging markets securitization from its origins in Latin America to its more recent uses during the Asian crisis. Securitization helped bring foreign investors back to Latin America after its debt crisis of the early 1980s. And while the Asian crisis has sharply reduced new issuance for all kinds of emerging market financings, the volume of securitization issues appears to have declined less precipitously than other types of transactions geared to foreign investors. Moreover, investment bankers are now hard at work planning new securitization issues for companies in both Latin America and Asia.
In exploring the longer-term effects of securitization on both domestic issuers and their economies, the author suggests that securitization could play a pivotal role in restoring emerging markets companies' access to global financial markets. Indeed, with a few exceptions such as Malaysia, most emerging markets are now responding to the crisis by taking measures to protect investors, such as requiring greater financial transparency and dispelling legal uncertainties that have discouraged securitization in particular and overseas investment more generally.     

The Determinants of Bank Capital Ratios in a Developing Economy

This paper reports new findings on the determinants of bank capital ratios. The results are from an unbalanced panel data set spanning eight years around the period of the 1997–1998 Asian financial crisis. Test results suggest a strong positive link between regulatory capital and bank management’s risk-taking behaviour. The risk-based capital standards of the regulators did not have an influence on how regulatory capital is adjusted by low-capitalized banks, perhaps due to the well-documented banking fragility during the test period. Finally, bank capital decisions seem not to be driven by bank profitability, which finding is inconsistent with developed country literature that has for long stressed the importance of banks’ earnings as driving capital ratios. Although the study focuses only on one developing economy, these findings may help to identify the correlates of bank capital ratios in both developed and developing economies since this topic has received scant attention of researchers. These findings are somewhat consistent with how banks engaging in risky lending across the world could have brought on the 2007–2008 banking liquidity and capital erosion crisis.     

Multinational banking and the international transmission of financial shocks: Evidence from foreign bank subsidiaries

Using bank-level data on 368 foreign subsidiaries of 68 multinational banks in 47 emerging economies during 1994–2008, we present consistent evidence that internal capital markets in multinational banking contribute to the transmission of financial shocks from parent banks to foreign subsidiaries. We find that internal capital markets transmit favorable and adverse shocks by affecting subsidiaries’ reliance on their own internal funds for lending. We also find that the transmission of financial shocks varies across types of shocks; is strongest among subsidiaries in Central and Eastern Europe, followed by Asia and Latin America; is global rather than regional; and becomes more conspicuous in recent years. We also explore various conditions under which the international transmission of financial shocks via internal capital markets in multinational banking is stronger, including the subsidiaries’ reliance on funds from their parent bank, the subsidiaries’ entry mode, and the capital account openness and banking market structure in host countries.     

Potential Competitive Effects of Basel II on Banks in SME Credit Markets in the United States

We examine the likely competitive effects of implementation of Basel II capital requirements on banks in the market for credit to SMEs in the U.S. Similar competitive effects from Basel II may occur for other credits and financial instruments in the U.S. and other nations. We address whether reduced risk weights for SME credits extended by large banking organizations that adopt the Advanced Internal Ratings-Based (A-IRB) approach of Basel II might significantly adversely affect the competitive positions of other organizations. The analyses suggest only relatively minor competitive effects on most community banks because the large A-IRB adopters tend to make very different types of SME loans to different types of borrowers than community banks. However, there may be significant adverse effects on the competitive positions of large non-A-IRB banking organizations because the data do not suggest any strong segmentation in SME credit markets among large organizations. JEL classification: G21, G28, G38, L51     

Hamilton and the U.S. Financial Revolution

In these excerpts from their recently published collection of Alexander Hamilton's writings on “Finance, Credit, and Debt,” the authors provide an overview of “the neatest, quickest financial revolution in history”—the one that took place in the United States during the six‐year tenure of its first Treasury Secretary. Between Hamilton's appointment by Washington in September 1789 and his resignation in February 1795, and as foreshadowed in letters that Hamilton was writing as early as 1780 (as a 23‐year‐old colonel in the Revolutionary army), the new nation saw the emergence of virtually all of what the authors identify as the six key components of modern financial systems. The financial revolution that produced the American financial system was accomplished through the following six developments:

1. The establishment of effective institutions of public finance, including a well‐functioning Treasury debt market, that would enable the government to fund its operations, to restructure its then massive unpaid debts (much of it owed to foreigners), and, perhaps most important, to establish the public credit that would enable it to borrow ever larger amounts on favorable terms.
2. The founding, in 1791, of a central bank to aid and oversee the government's finances and serve as the main supervisor and coordinator of the country's emergent banking and financial systems. By 1795, the Bank of the United States had five offices in different states and thus the beginnings of a national branch banking system.
3. The creation, in 1791, of the U.S. dollar as the country's first national currency. With gold and silver as the monetary base into which bank notes and deposits were convertible, the dollar was endowed with the stability of value that would make it a sound basis for long‐term contracts (such as bonds) as well as a safe asset in which to hold savings. By 1795, all the states, which had earlier issued their own notes and currency, had become members of the national currency union.
4. The development of a private banking system by encouraging state governments to charter banks to support their own finances and lend to businesses and individual entrepreneurs. By 1795, the three state‐chartered U.S. banks that existed in 1789 had become 20, providing the beginnings, with the five offices of the central bank, of what would become a vibrant (if crisis‐prone) American banking system.
5. The establishment of securities markets designed to make financial assets—both government and private‐sector bonds, and equities (including stock in the Bank of the United States)—liquid and transferrable. By 1795, Philadelphia, New York, and Boston all had established organized exchanges for trading national as well as local bonds and, in some cases, stocks.
6. The growth of business corporations, financial (such as banks and insurance companies) as well as industrial (utilities, manufacturers, and road, bridge, and canal companies), thereby encouraging the pooling of individuals’ capital that would allow the creation of larger enterprises that could realize economies of scale.

Thanks to these six developments, the United States was transformed from a bankrupt and severely divided nation in 1789 with huge debts to overseas creditors to a country whose government in 1795 produced a large budget surplus and whose securities were viewed by foreigners as among the most creditworthy in the world. And that was important since, as Hamilton clearly foresaw from the start, the U.S. government would have to rely heavily on overseas capital to fund its operations.     

Bank Leverage and Monetary Policy's Risk‐Taking Channel: Evidence from the United States

We present evidence of a risk‐taking channel of monetary policy for the U.S. banking system. We use confidential data on banks’ internal ratings on loans to businesses over the period 1997 to 2011 from the Federal Reserve's Survey of Terms of Business Lending. We find that ex ante risk‐taking by banks (measured by the risk rating of new loans) is negatively associated with increases in short‐term interest rates. This relationship is more pronounced in regions that are less in sync with the nationwide business cycle, and less pronounced for banks with relatively low capital or during periods of financial distress.     

中美商业银行股利分红比较研究

随着资本市场的不断发展,我国证券监管部门和投资者越来越重视上市公司的股利分红问题,尤其是在我国经济中扮演着＂心脏＂角色的银行业的分红问题。然而在我国商业银行中不科学的股利分配现象还普遍存在,如股利支付率低、分红频率不高等。因次,分析我国商业银行的股利分配政策,无论对于银行业本身还是资本市场的发展都具有重要意义。本文通过对比分析中美两国上市商业银行股利分配的差异,探究其原因,并在借鉴美国成熟资本市场的经验下,提出了通过税收政策引导资本市场、推进利率市场化、改变银行盈利模式、建立多元化股权结构等措施完善我国商业银行分红情况的政策建议。     

Banking System Bailout-Scandinavian Style

During the Scandinavian banking crisis in the early 1990s, Norway and Sweden chose somewhat different routes to crisis resolution, though both involved government intervention and both proved effective. The Norwegian government injected a hybrid debt-equity form of capital into the largest commercial bank, though only after first extinguishing old equity claims. The Swedish government issued a system-wide debt guarantee and allowed shareholders to maintain their equity stakes, provided they also contributed new equity capital to the banks. In the (single) case where equityholders refused to participate, the government took over the bank and divided it into a “good” and “bad” part, with the latter holding the non-performing loans. The resolution of banking system problems in Scandinavia provides a useful precedent for the recent “bailout” of the U.S. banking system, which, after some initial trial and errors, also involved government ownership of shares in financial institutions. As the author notes in closing, the Scandinavian experience is also relevant for addressing the question of how the U.S. government, having effectively become “owner of last resort” in key financial institutions, should handle its controlling equity stakes.