State banks, institutions and financial development

SSRN Electronic Journal, 2000

This paper explores how the legal environment affects bank behavior in 20 transition economies. Based on a newly constructed data set we find that banks' loan portfolio composition depends on the legal environment. If banks operate in a well-functioning legal environment they lend relatively more to SMEs and provide more mortgages.

Economía, 2007

We revisit the public banks debate, survey the theoretical arguments and test the robustness (and expand) the existing empirical evidence. While we find some support for the view that public banks do not allocate credit optimally, we also report indicative evidence that they exert a positive influence on private bank efficiency, and may contribute to reduce credit procyclicality. Ultimately, we find that the recent criticism to public banks has generally been based on inconclusive crosscountry evidence. More specific bank-level research is still needed to substantiate a case for or against public banks in developing economies.

I consider bank instability as the outcome of the conflict of interests a bank faces acting as financial intermediary between borrowers and depositors. Banks engage in two principal-agent relationships -one with borrowers where it acts as principal and one with depositors where it acts as agent. As such, a bank necessarily finds itself in competing and potentially compromising relationships. Because bank activities take place within the tangible and intangible structure of institutions and because behavior is affected by the incentives or disincentives they create, institutions -legal, political, sociologic, economic, and banking -can shape, in part the outcome of the transactions. I explore the role played by these institutions in moderating the conflict of interests and thus bank instability. I find that bank regulation and supervision measures as well as corruption and ethnic heterogeneity impacts bank instability.

Research in Economics, 1998

In this paper, a simple model to examine the problems faced by emerging economies in developing their financial systems is presented. main findings areas follows. First, the combination of corporate governanceand management entrenchment problems in the real sector with monitoring inefficiency in banking leads to impediments in the development of the capital market. Second, banks both compete with and complement capital markets. If banks are sufficiently inefficient, they attract all the borrowers away from the market, and the market does not develop. Improvements in bank efficiency, up to a point, lead to borrowers accessing the market, so that banks complement the market. Beyond that point, banks and the market compete, and further improvements in bank efficiency lead to more borrowers approaching banks. This framework is used to extract policy implicationsforfinancial system design in transitional and state-dominated economies.

Management Science, 2019

Within countries, individual state-run banks' lending correlates with prior money growth; similar private-sector banks' lending does not. Aggregate credit and investment growth correlate with prior money growth more where banking systems are more state-run. Size and liquidity differences between state-run and private-sector banks do not drive these results; further tests discount broad classes of alternative explanations. Tests exploiting heterogeneity in political pressure on state-run banks associated with privatizations and elections suggest a command-and-control pseudo-monetary policy channel: changes in money growth, perhaps reflecting political pressure on the central bank, change banks' lending constraints; political pressure actually changes state-run banks' lending.

Czech Journal of Economics and Finance, 2014

This paper investigates the links between institutional quality and government policy in banking sector development, using data from 80 low-, middle-and high-income economies during 1985-2007. In order to investigate the effect of economic, political and social institutions on bank-based development, we employ dynamic panel techniques and, more specifically, the system-GMM estimator, which controls for endogeneity among variables. The results demonstrate that: i) economic institutional quality, and especially the legal dimension, is the main determinant for banking sector development; ii) social institutions have a greater impact for low-and middle-income countries, while political institutions have a greater impact for high-income countries; and iii) government policy, in terms of government size, is crucial regardless of the stage of economic development.

Journal of Management and Financial Sciences, 2024

Financial stability is essential for the functioning of the economy, and competition between banks is seen as an essential factor for their stability. Reframing the conflict and each party's goals in such a way that they are mutually dependent increases a party's chances of reaching an agreement. This study investigates the relationship between bank size and the institution's stability. Government regulators and anyone else's ability to keep an eye on the entire financial system is jeopardized when large portions of it are left largely unregulated. Price competition (marginal-cost pricing) reduces the market power of a single firm as the number of firms in an industry grows. Since the 1990s, the banking industry, according to previous studies, has been experiencing concentration and competition. Some argue that the lack of technology in small banks may put them at an advantage in terms of customer satisfaction, but this is not necessarily the case.

2007

We propose a simple framework to explore how different market structures in the banking system affect credit allocation, and how deposits and number of entrepreneurs affect the equilibrium number of banks in the economy. We find that within the Marshallian aggregate surplus perspective, the number of entrants in the banking system is always larger than the socially optimal number of banks.

Journal of Financial Stability, 2024

Every financial crisis raises questions about how the banking market structure affects the real economy. Although low bank concentration may reduce markups and foster riskier behavior, concentrated banking systems appear more resilient to financial shocks. We use a nonlinear dynamic stochastic general equilibrium model with financial frictions to compare the transmissions of shocks under different competition and concentration configurations. The results reveal that oligopolistic competition amplifies the effects of the shocks relative to monopolistic competition. The transmission mechanism works through the markups, which are amplified when banking concentration is increased. The desirable banking market structure is determined according to financial stability and social welfare objectives. Moreover, we find that depending on policymakers' preferences, a banking concentration of five to eight banks balances social welfare and bank stability objectives in the United States.

Credit and Capital Markets – Kredit und Kapital

One of the most evident consequences of the Great Financial Crisis has been a rapid expansion of banking regulation. We argue that the burden of the new regulatory system is asymmetric, driving small banks to the "too-small-to-survive" zone, while reinforcing the "too-big-to-fail" protection for big banks. The asymmetric effect on banking structure produces related asymmetries on firms and regional economies, in light of the fact that small firms and peripheral regions are highly dependent on bank credit and need strategic proximity of banking structures. Finally, our review of the literature on different countries and on different periods of time, including the financial crisis years, suggests the importance of a differentiated banking model when firms and regions are heterogeneous. There is no obvious optimal size of bank.

Journal of Money, Credit and Banking, 1998

Efficient banks are essential for capitalist economies, yet bank failures result in costly externalities, lending to a potential conflict between the risk choices of private agents that own banks and socially optimal choices. This conflict is particularly severe in tran- sition economies. Evidence suggests that these economies have banking systems that are both prone to failure and inefficiently small; established banks suffer from an over- hang of bad loans, and implicit subsidies often favor continued lending to inefficient state-owned enterprises (SOEs). If a regulator seeks to impose higher capital standards to reduce the odds of bank failure, privately held banks may instead exit the industry, shrinking a system that is already inefficiently small. If loans to SOEs are subsidized so as to mitigate repercussions from their failure to workers and to banks, established banks may prefer such loans over riskier unsubsidized loans to entrepreneurial firms. Encouraging entry into banking may mitigate this problem, but the new banks will be quite risky and prone to failure. The upshot is that, in transition economies, achieving an efficient banking system is likely to require significant instability.

SSRN Electronic Journal, 2013

We consider a two-period model of a banking system to explore the e ects of competition on the stability and e ciency of economic activity. In the model, competing banks lend to entrepreneurs. After entrepreneurs receive the loans for their projects, there is a probability of a shock. The shock implies that a fraction of rms will default and be unable to pay back their loans. This will require banks to use their capital and reserves to pay back depositors, restricting restrict second period lending, thus amplifying the economic e ect of the initial shock. There are two possible types of equilibria, a prudent equilibrium in which banks do not collapse after the shock, and an imprudent equilibrium where banks collapse. We examine the e ects of increased competition in this setting. First, we nd existence conditions for prudent equilibria. Second, we show that the e ect of increased banking competition is to increase the e ciency of the economy at the expense of increased variance in second period economic results. In particular, if the probability of a shock is small, increased competition raises both expected GDP over the two period and expected activity in the second period, after the shock. Increased competition also increases the attractiveness of imprudent equilibria. Unpredicted regulatory forbearance in the aftermath of a shock can be used to reduce or eliminate the variance in economic activity. However, if regulatory forbearance is expected in response to a shock, the e ect on the variance after the shock is ambiguous and can even lead to increased variance after a shock. We also show the expected result that as the size of a shock increases, there is less lending in a prudent equilibrium. Finally we show that independently of the type of equilibria or the possibility of a switch among types of equilibria, increased banking competition increases the ampli cation e ect after a shock.

2008

2011

We study versions of a general equilibrium banking model with moral hazard under either constant or increasing returns to scale of the intermediation technology used by banks to screen and/or monitor borrowers. If the intermediation technology exhibits increasing returns to scale, or it is relatively efficient, then perfect competition is optimal and supports the lowest feasible level of bank risk. Conversely, if the intermediation technology exhibits constant returns to scale, or is relatively inefficient, then imperfect competition and intermediate levels of bank risks are optimal. These results are empirically relevant and carry significant implications for financial policy.

Review of Economics Finance, 2015

Based on a traditional approach to the behavior of a bank which lends both private and public sector, and utilizing a typical expression for public debt accumulation, this paper concludes that the optimality of the number and size of banks depends heavily on the course of the public debt, ceteris paribus. If the intergenerational dimension of the public debt is assumed away, fiscal consolidation presupposes a limited number of banks under normal only profit, a sort of quasicompetitive banking. In the presence of intergenerational considerations, fiscal consideration requires a few efficient banks experiencing perhaps positive profit, which is consistent with the notion of workable competition. Consequently, the pre-consolidation size distribution of banks is immaterial policy-wise.