Transcript Financial Sector Reform - Federal Reserve Bank of Atlanta

Financial Sector Reform
Discussion on
Bekaert, Harvey and Lundblad
Galindo and Micco
Sergio Schmukler
Rethinking Structural Reform Conference
Federal Reserve Bank of Atlanta
Inter-American Development Bank
October 2003
Discussion Outline
1.
Reform agenda: logic and scope
Broader than these papers
Broader than financial sector reforms
2.
Outcomes for Latin America: mixed or disappointing
Extensive to other regions
Not as predicted by these papers
3.
If reforms did disappoint, why?
Policy alternatives to these papers’ recommendations
4.
Liberalization papers
5.
Creditor rights paper
2
1. Reform Agenda: Logic
Generate more and cheaper financing
GOVERNMENT
FIRMS
More
financing
Supervision and
regulation
BANKS
(fragile and
inefficient)
Increased
competition
Cheaper
financing
CAPITAL
MARKETS
Wider set of
instruments
Higher
returns
INVESTORS
3
1. Reform Agenda: Logic
Sweeping reforms throughout financial sector
•Supervisory agency
•Investor protection
More retail
investment
•Depository and clearing
•Trading platforms
Mitigate information
and agency problems
CAPITAL
MARKETS
DEMAND
Long-term financing
and specialization
•Pension funds
•Mutual funds
•Insurance companies
Improve exchange
infrastructure
Foreign capital
available
More discipline
and efficiency
•Financial
liberalization
Lower
transaction costs
SUPPLY
Increase
liquidity
Promote stocks
dissemination
•Privatization
•Tax incentives
4
1. Reform Agenda: Actions
Financial liberalization increasing since late-1980s
Latin America: Indices of Financial Liberalization by Sector
More
3.0
liberalization
2.5
2.0
1.5
Domestic Financial Sector
Capital Account
2002
2001
2000
1998
1999
1997
1996
1995
1994
1993
1992
1990
1991
1989
1988
1987
1986
1985
1983
1984
1982
1981
1980
1979
1978
1977
1975
1976
1974
Less
0.5
liberalization
1973
1.0
Stock Market
Countries included are Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela. The value 1 means
repression, 2 partial liberalization, and 3 full liberalization. Figures correspond to end-of-month values.
Source: Kaminsky and Schmukler 2002
5
1. Reform Agenda: Actions
Other reforms implemented in the early-1990s
Percentage of Latin American Countries that Implemented Reforms
100
81
69
31
69
69
25
25
25
13
6
Creation of current
supervisory agency
Establishment of
insider trading laws
Before 1990
Enforcement of
insider trading laws
1990-1995
69
Improvement in Law
and Order index
1996-2001
The figure shows the percentage of countries (from a group of 16 countries) that had implemented reforms before
1990, in 1990-1995, and in 1996-2001. Countries included are Argentina, Bolivia, Brazil, Chile, Colombia, Costa
Rica, Ecuador, Guatemala, Honduras, Jamaica, Mexico, Panama, Paraguay, Peru, Uruguay, Venezuela.
6
Sources: Bhattacharya and Daouk 2000, ICRG, and local data
1. Reform Agenda: Actions
Reforms occurred mostly after liberalization
Sequencing: Financial Liberalization and Institutional Reforms
Probabilities of Liberalization Conditional on
Law and Order
Insider Trading Laws Existence
Insider Trading Laws Enforcement
Partial Liberalization
0.0
14.3
0.0
Full Liberalization
28.6
71.4
14.3
The table shows the percentage of coutries that had implemented reforms before partial and full liberalization.
Countries included are Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela.
7
Sources: Bhattacharya and Daouk 2000, Kaminsky and Schmukler 2001, and ICRG
2. But Results Not as Expected
(Reforms are good according to these papers)
Equity markets

Visible growth (market cap), but not as in OECD
Rising concentration and delisting
Migration to international equity markets
Small relative to bond markets
8
2. But Results Not as Expected
Bond markets
Dominated by government paper
Dollarization
Short duration
Currency and maturity mismatches
Institutional investors
Fast growth but tapped by governments
9
2. But Results Not as Expected
Latin America Equity Market Growth Is Poor
Stock Market Capitalization
Percentage of GDP
150
125
Latin American countries
Asian countries
G-7 countries
100
75
50
25
0
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
Countries included are Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela. Asian countries: Hong
Kong, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand. G-7countries: Canada, France, Germany, Italy,
Japan, U.K., and U.S. Figures correspond to end-of-year values.
Sources: IFC's Emerging Markets Database, World Federation of Exchanges (FIBV), and The World Bank
10
2. But Results Not as Expected
Stock Exchanges Affected by Increasing De-listing
Domestic Stock Exchanges: Number of Companies
600
500
400
300
200
100
0
Argentina
Brazil
Chile
1990
Source: IFC's Emerging Markets Database
Colombia
1995
Mexico
Peru
Venezuela
2000
11
2. But Results Not as Expected
Large Companies Migrate to International Markets
Latin American Companies: Value Traded
USD Millions
250,000
200,000
Internationalized companies in international market
Internationalized companies in domestic market
Domestic companies
150,000
100,000
50,000
0
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Countries included are Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela. Internationalized
companies are defined as companies that cross-list or raise capital in international stock markets at some point in
time. Figures correspond to end-of-year values.
Sources: The Bank of New York, Euromoney, and IFC's Emerging Markets Database
12
2. But Results Not as Expected
Equities Traded Belong to a Handful of Large Firms
Stock Market Concentration (end-2000)
Percentage
80
70
60
50
40
30
20
U.S.
U.K.
Japan
Thailand
Malaysia
Hong Kong
Venezuela
Peru
Mexico
Colombia
Chile
Brazil
0
Argentina
10
Share of trading of top ten companies
Source: IFC's Emerging Markets Database
13
2. But Results Not as Expected
Public Bond Trading Outweighs Equity Trading
Value Traded in Domestic Markets (2000)
Percentage of GDP
68
14
12
10
8
6
4
2
0
Argentina
Bolivia
Colombia
Government bonds
Ecuador
El Salvador
Mexico
Equities
The figure shows the value traded through the domestic exchanges. However, in the case of Mexico, repo
operations (conducted or not through the exchange) are also considered.
Sources: Local data, The Handbook of World Stock, Derivative & Commodity Exchanges 2001, Federacion
Iberoamericana de Bolsas de Valores (FIABV), and The World Bank
14
3. If Reforms Did Disappoint, Why?
Wrong sequencing
Financial integration went too fast
Imperfections in international markets lead to vulnerabilities
when domestic sector is not ready
Thus, follow right sequencing
But, are there sufficient incentives to reform institutions
without the discipline from openness and crisis?
Wait for the fruits of reforms and do more
The dividends from reforms have long gestation period
Thus, accelerate pace
But, we all know what happens in the long run
15
3. If Reforms Did Disappoint, Why?
Wrong expectations
Recommendations based on cross-sectional evidence
Reforms did not tackle well some basic issues for EMs
Macro policy
Systemic risk
Domestic and external shocks, e.g. capital flows volatility
Institutional factors – size, information asymmetries, moral hazard
Globalization
Thus, redesign reform to address the basic issues, and revise
expectations
But, many of these issues are intrinsic to emerging markets
and solving them is a daunting task
16
4. Liberalization Papers
Great papers!
Important contributions
Welfare implications relative to previous work
Growth mean and volatility
Solid work
Almost painful to read, “overwhelming force”
Incorporated most comments received in the past years, so
difficult to discuss
Particularly for the growth mean paper
Volatility paper needs to address the same comments that
spur paper already did
17
4. Liberalization Papers
Potentially relevant issues to consider
“One of the most fundamental national policy decisions of
the past 25 years has been the liberalization of equity
markets across the world.”
Here, allowing foreigners to purchase domestic stocks
But witness size of stock markets
And witness effects of capital account liberalization
Which samples/estimations make sense?
Mix of developed and developing, including very poor countries
Including countries with no change in liberalization
Time series for emerging markets
Fixed effects estimations
Coefficient diminishes to 0.56
But why including countries with no variation in liberalization here?
18
4. Liberalization Papers
Potentially relevant issues to consider (continued)
More on econometrics
Overlapping observations
How are common factors treated besides SUR specification?
How is endogeneity addressed, specially given that it comes up in
the growth paper?
Removing 97-00 seems arbitrary
Crises as outliers? Rationale?
Why including 99 and 00?
Perhaps, crises consequence of liberalization, as suggested
Even with crises, other evidence points towards lower volatility
19
4. Liberalization Papers
Caveats related to liberalization measures
Wider set of financial liberalization measures
Pace of liberalization
Reversals
Intensity of liberalization
Capital account liberalization
Might seem more important to many readers
Treatment of capital account liberalization
20
4. Liberalization Papers
Other specific points
More on economic significance would be welcomed
Results weakened with other controls
For LAC countries, mean results insignificant
Other regressors
Other controls, like GDP per capita
Level of inflation might matter
Risk sharing
Perhaps, could be another paper
Ability versus actual risk sharing
21
5. Creditor Rights Paper
Great paper!
Important points of the paper
Effectiveness of creditor rights, interacted with
With rule of law
With efficiency of the judiciary
With small and medium firms
Perhaps nicest results
Three effects of creditor rights
Credit/GDP
Share of bank credit financing of small and medium firms
Change in real credit (procyclicality)
22
5. Creditor Rights Paper
Potentially relevant issues to consider
More consistency across empirical analysis
Creditors rights, rule of law, or broad institutions?
No multivariate analysis, omitted variables
Only done very partially for change in credit, when controlling both
for creditor rights and rule of law
Perhaps, control for GDP per capita, given that GNP and GDP
growth not significant
Interaction might result more from law and order
explanatory power than from creditor rights
Perhaps interact with GDP per capita and other variables
Why is creditor rights insignificant by itself second part?
23
5. Creditor Rights Paper
Potentially relevant issues to consider (continued)
Why procyclicality?
Risk can be reduced ex-ante, knowing state of institutions
More explanation would be welcomed
Policy recommendations
Cross section evidence versus time series recommendation
More reforms needed
Foreign jurisdictions
Systemic shocks and creditors right
Repudiation of contracts
Shocks to collateral
In fact, acknowledged importance in institutional analysis
24
5. Creditor Rights Paper
More on data and variables
Macro variables not significant, except budget deficit
WEBS survey
Only for 1999
Share of investment financed with bank credit and legal
protection
What about other type of financing
Other specific point
Econometrics
Procyclicality results weak using IVs
Clustering standard errors
25