Debt and development: The role of foreign capital in economic growth

Capital flows, whether between individuals or nations, are dominated by a two- fold paradox. Borrowers are initially primarily interested in obtaining sufficient funds for their needs, but once they have obtained a loan, their indebtedness becomes their principal concern. While a loan is being negotiated the lenders usually have the upper hand, but once it is made, they become dependent on the borrowers for repayment with interest. Their power to withhold future loans becomes their only real measure of control. Borrowing and lending has costs and benefits, and these balance out only in exceptional cases for both the borrowing and lending countries and the principal social groups within them. The debate about the impact of international capital flows accordingly has a long history. This paper begins with a historical perspective, and then reviews the principal characteristics of capital flows to developing countries since the 1950s. A discussion of the impact of capital flows on development, with a particular emphasis on trends in developing country indebtedness, follows. A brief examination of borrowing and debt management issues for borrowers, lenders and the international community concludes the paper.     

Financial Deregulation and the Bank Lending Channel in Developing Countries: The Case of Indonesia

The dominant role of commercial banks as a source of finance and the considerable asymmetry of information in financial markets in developing countries have raised an argument that the bank lending channel of monetary transmission mechanism would be very important in such countries. This study addresses the issue by investigating empirically whether there are differential effects of monetary policy on banks' balance sheets, and its implications to the existence of the bank lending channel of monetary policy in Indonesia, especially since the early 1980s when the government adopted a policy of financial deveculation. We find significant differences of balance sheet behaviour across bank classes in response to a change in monetary policy, consistent with the predictions of the bank lending view. We also found that because of access to foreign funds and the existence of bank loan commitment, the monetary policy was unable to constrain loan supply by the large (state) banks, indicating that the bank lending channel operates through smaller (non-state) banks.     

Loan interest rate pass-through and changes after the financial crisis: Japan’s evidence

We estimate interest rate pass-through in the loan market using an individual bank-based panel dataset from Japan. Previous studies using data from European countries have presented a number of common findings, including that banks with a high proportion of relationship lending tend to set lower pass-through. In this respect, we have obtained similar results using a dataset for Japan going back to the early 2000s. We further examine the influence of borrowing firms’ balance sheet characteristics on loan interest rate pass-through, and find that these additional factors are also important determinants for pass-through dispersion. However, after the recent global financial crisis, even banks with a high proportion of relationship lending have largely lowered loan interest rates by raising pass-through, and pass-through has not necessarily been determined in accordance with borrowing firms’ balance sheet characteristics. These results differ from those of recent studies on European countries. Possible background factors explaining this change are that (i) pressure to lower loan interest rates has risen due to extensive monetary easing and greater lending competition among banks, while Japan’s banking system as a whole has maintained its resilience in the post-crisis period; (ii) demand for bank loans has increased substantially due to disruptions in the market for alternative funding sources, such as commercial paper and corporate bonds; and (iii) public measures to increase bank loans have been broadly introduced in Japan.     

Paying back to borrow more: Reputation and bank credit access in early America

The birth of commercial banking in New England after the American Revolution provides an important case to examine banking development under asymmetric information. Similar to credit markets in developing countries today, bank borrowers of early America usually had little or no collateral. This paper uses a unique data set based on loans between 1803 and 1833 for Plymouth Bank to examine bank lending policies in the absence of collateral. Empirical evidence suggests that borrowers with little collateral established their credit-worthiness through repeated interaction with banks.     

The mother of all sudden stops: capital flows and reversals in Europe, 1919–32

New data documenting European bond issues in major financial centres from 1919 to 1932 show that conditions in international capital markets and not just in borrowing countries are important for explaining the surge and reversal in capital flows. In particular, the sharp increase in stock market volatility in the major financial centres at the end of the 1920s figured importantly in the decline in foreign lending. This article draws parallels with Europe after 2008.     

Monetary policy transmission through the bank lending channel in Thailand

This paper investigates the strength of the bank lending channel in the transmission of monetary policy in Thailand. Bank behavior is captured by quarterly balance sheet data for ten commercial banks of diverse size for the period 2007-2016. Based on a flexible form profit function, bank supply and demand equations are estimated that capture lending and funding choices. The estimation results are used to derive time-dependent supply and demand elasticities which are then combined with estimates of pass-through from the policy rate to retail rates to simulate the dynamic impact of a monetary tightening on bank portfolio allocations. Due to pass-through differentials among retail interest rates, an increase in the policy rate is shown to raise the cost of loan-production relative to the return on loans, thereby motivating banks to contract their lending. Small banks show a greater degree of loan contraction than large banks because large banks are better able to fund continued lending through debt issuance. Because the Thai economy relies heavily on bank loans, these findings suggest that the bank lending channel is an important conduit for the transmission of monetary policy in Thailand.     

Does a large loss of bank capital cause Evergreening? Evidence from Japan

Using the real estate lending share of the bank’s loan portfolio at the peak of the land-price bubble as an instrument for bank capital, we identify the impact of capital adequacy on the allocation of bank lending under the Basel regulatory framework. We find that, in Japan, a large loss of bank capital caused by the regulator’s excessively tough stance towards banks not only induced the contraction of the bank lending supply but also the banks’ reallocation of their lending portfolios to financially unhealthy industries with a higher concentration of non-performing loans.     

Do contagion effects exist in capital flow volatility?

The cross-border transmission of a financial shock has been a subject of rich literature. While a large number of studies have focused on the phenomenon of strong co-movements of asset prices and capital flows in the event of financial stress, very few discussed the contagion or spillover effects in terms of capital flow volatility. This paper is one of the first attempts to assess, empirically, whether or not there is a global and regional spillover effect in the volatility of capital flows to emerging and developing countries. Based on the sample of 49 emerging and developing countries for the period 1980–2009, the empirical results suggest strong and significant contagion effects in the volatility of capital flows to individual economies. The magnitudes of contagion vary depending on the type of capital flows, whether it is foreign direct investment (FDI) or portfolio and other investment (mostly bank lending). The findings also suggest the volatility dynamics of gross flows is different from that of net flows. The volatility of net inflows is more exposed to intra-regional contagion compared to that of gross inflows.     

International Financial Contagion and the Fund —A Theoretical Framework

In this paper we provide a model of contagion in which countries are linked through the international capital market which allows borrowing and lending for consumption smoothing. Borrowing from the International Monetary Fund also provides a mechanism for countries to smooth consumption intertemporally. Facing a large shock that makes it impossible for a country simultaneously to achieve a desired minimum level of consumption and to service its foreign debt, the country will default. This will put some upward pressure on world interest rates, which raises the debt service costs of other indebted countries and can generate further rounds of defaults. In this environment the Fund has an important systemic function in lending to members to limit the extent of contagion and default. The Fund can be seen as internalizing the externality generated by the contagion that spreads through the channel of the world capital market that links all countries. JEL Classification Numbers: E44, E61, F33, F34     

资本充足率、存款准备金率与货币政策银行信贷传导——基于银行业市场结构的分析

基于垄断竞争的银行业市场结构,研究银行在受到资本充足率和存款准备金率双重约束条件下,在面对货币政策冲击的情况下所做出的最优信贷决策行为。通过构造贷款市场总体均衡模型,得出以下结论:当银行满足资本充足率和存款准备金率要求时,货币政策的银行信贷传导渠道表现出有效性;而当贷款市场中的银行不能满足资本充足率或存款准备金率要求时,货币政策的银行信贷传导渠道则表现出无效性。     

North-South multipliers

This paper describes multiplier (magnifier) effects in the impact of growthof industrial countries on growth, exports and terms of trade of developing countries. The data are mainly derived from World Bank projections for the 1980s. This is supplemented by historical data on the effects of the slow-down in 1973–1980 compared with previous years, provided by the IMF. The overall multiplier effect on LDC growth has been prevented by compensatory action (mainly rapid expansion of commercial bank lending) but only at the cost of rapidly increasing debt burdens - a postponement rather than a solution of the problem.     

Influence of real estate prices on domestic bank loans in Southeast Asia

This study examines whether and how fluctuations in real estate prices affected bank lending in Malaysia, Singapore, and Thailand before and after the 1997–98 Asian financial crisis. Since the crisis, it has been claimed that the rise and fall in the price of real estate, which is used as collateral, affected bank lending and the macroeconomy in these Southeast Asian countries. The study implements a dynamic model of bank lending and employs a test using the panel data of domestic bank balance sheets in order to estimate the influence of real estate prices on new bank lending in the three countries. The study also examines the conditions surrounding the role of real estate as collateral for bank loans in the countries. The regression results suggest that fluctuations in real estate prices can influence domestic bank lending and did so, especially after the crisis in Singapore and Thailand, and that domestic bank lending behaviour in these countries changed after the crisis.     

The Global Financial Crisis and Sub‐Saharan Africa: The Effects of Slowing Private Capital Inflows on Growth*

Abstract: This paper uses the bias‐corrected least‐squares dummy variable (LSDV) estimator to examine the relationship between economic growth and four different types of private capital inflows (cross‐border bank lending, foreign direct investment (FDI), bonds flows and portfolio equity flows) on a sample of 15 selected sub‐Saharan African countries over the period 1980–2008. Our results show that FDI and cross‐border bank lending exert a significant and positive impact on sub‐Saharan Africa's growth, whereas portfolio equity flows and bonds flows have no growth impact. Our estimates suggest that a drop by 10 per cent in FDI inflows may lead to a 3 per cent decrease of income per capita growth in sub‐Saharan Africa, and a 10 per cent decrease in cross‐border bank lending may reduce growth by up to 1.5 per cent. Therefore, the global financial crisis is likely to have an important effect on sub‐Saharan Africa's growth through the private capital inflows channel.     

Financial Liberalization and Foreign Bank Entry on the Domestic Banking Performance in MENA Countries

Abstract: This study examines the impact of financial liberalization and foreign bank entry on the domestic banking sector from 1996 to 2007, and builds upon and expands the work of Lee (2002). We find that foreign bank entry, financial liberalization, ownership structure and degree of openness of foreign bank entry positively impact domestic banking system operating efficiency, capitalization, risk management, long‐term soundness, financial performance as well as economic and financial development. However, foreign bank entry is associated with reduced profit margins and increased operating costs of domestic banks in countries with less developed capital markets. Empirical evidence seems to support the argument that foreign bank presence leads to better allocation of capital and eliminates connected lending practices.     

Bank capital and lending: Evidence of nonlinearity from Indonesia

This paper studies the transmission of bank capital shocks to loan supply in Indonesia. Using bank data for the period 2001:Q1 to 2018:Q4, we estimate dynamic panel data models of bank lending. We find nonlinear effects of capital on loan growth. Specifically, the response of weakly capitalized banks to changes in their capital positions is larger than that of strongly capitalized banks. This non-linearity implies that not only the level of capital but also its distribution across banks in the system affects the transmission of shocks to aggregate lending. Likewise, the effects of bank recapitalization on loan growth depend on banks’ starting capital positions and the size and distribution of capital injections.     

Fiscal capacity and commercial bank lending under COVID-19

We investigate the implications of government indebtedness for the efficacy of expansionary government spending in encouraging commercial bank lending growth during the COVID-19 pandemic. Our sample is a large cross-section of over 3000 banks from 71 countries. To address the likely endogeneity of government assistance, we instrument for extra-normal spending using disparities in pre-existing national political characteristics. Our results indicate that bank lending did respond to fiscal capacity, as higher public debt going into the crisis weakened the expansionary effects of higher spending on bank lending at economically and statistically significant levels. Moreover, this sensitivity was higher among weaker banks, suggesting sensitivity to the perceived implications of spending for government assistance going forward. We also found greater sensitivity in high-income economies and for small and medium-sized banks. Our results are robust to a variety of robustness tests, including perturbations in specification, sample, and estimation methodology.     

我国风险投资领域引入商业银行资金的可能性及运作模式探讨

我国风险投资业发展至今,风险资本来源单一逐步成为阻碍其进一步发展的因素。同时,我国商业银行面对日益激烈的外来竞争,也存在开拓新业务、增加收益来源、确保资本保值增值的需求。文章通过对比国内外现有的商业银行参与风险投资的实践,提出了切合我国实际的运作模式,以推动     

Going multilateral? Financial markets' access and the League of Nations loans, 1923–8

Why are international financial institutions important? This article reassesses the role of the loans issued with the support of the League of Nations. These long‐term loans constituted the financial basis of the League's strategy to restore the productive basis of countries in central and eastern Europe in the aftermath of the First World War. In this article, it is argued that the League's loans accomplished the task for which they were conceived because they allowed countries in financial distress to access capital markets. The League adopted an innovative system of funds management and monitoring that ensured the compliance of borrowing countries with its programmes. Empirical evidence is provided to show that financial markets had a positive view of the League's role as an external, multilateral agent, solving the credibility problem of borrowing countries and allowing them to engage in economic and institutional reforms. This success was achieved despite the League's own lack of lending resources. It is also demonstrated that this multilateral solution performed better than the bilateral arrangements adopted by other governments in eastern Europe because of its lower borrowing and transaction costs.     

The lending channel of monetary policy in Indonesia

This study evaluates the bank lending channel of monetary policy in Indonesia by using quarterly bank-level data over the period of 2005-2016. I find that the lending channel of monetary policy works for all banks, both large and small. The results suggest that higher capital buffers and better liquidity positions moderate the impact of changes in monetary policy on credit growth for large banks, while capital buffers and liquidity positions do not alter the strength of the lending channel for small banks. The findings indicate that the central bank can use prudential instruments affecting capital buffers and liquidity positions for managing the strength of adjustment in the monetary policy interest rate on bank credit growth.     

Bank Lending and Business Cycles: South African Evidence

Abstract: The paper provides empirical analysis on the linkage between the behavior of bank lending and business cycles in South Africa. Consistent with theory, overall evidence suggesting pro‐cyclicality of bank lending is uncovered both at macro and micro levels. At macro level, bank lending and lending rates have moved in tandem with business cycles. Real borrowing by government was counter‐cyclical to business cycles as would be expected if the role of government was to fine‐tune the economy during booms and recessions. At micro level, bank lending to households and firms was generally pro‐cyclical. Even the growth of provisioning by banks has been largely pro‐cyclical to business cycles, though exceptions were recorded. First, new mortgage lending exhibited counter‐cyclical behavior before 1993. We attributed this behavior to the political and economic climate prevailing then which created uncertainties that made ownership of property a good hedge against economic and political risks. Secondly, the growth of real credit for investment and of foreign trade finance does not appear to have been related to business cycles.