We assess the ﬁnancial stability–economicperformance nexus with the dynamic panel GMM estimations methodology of Beck and Levine (2004) , which we extend to the ﬁnancial stability dimension. This framework relates ﬁnancial depth and economicperformance and has been used extensively in the literature, pro- ducing results that are comparable across a wide array of contribu- tions. We test whether ﬁnancial stability has a causal effect on economicperformance and its subcomponents – consumption, in- vestment and disposable income – on different samples of EU coun- tries. Our benchmark time sample is 1998 –2011, because of the ﬁnancial stability data availability, and we use proxy data to extend the analysis from 1960 to 2011. The effect of ﬁnancial stability is estimated independently of the level of ﬁnancial depth, but we control for the latter in order to avoid capturing its speci ﬁc effects. We also control for a potential non-linear relationship between ﬁnancial depth and ﬁnancial instability with interaction terms, and ﬁnd that ﬁnancial instability affects economicperformance independently of the degree of ﬁnancial depth. We use different ﬁnancial instability indicators that measure the macro- and micro-dimensions of ﬁnancial stability: the Composite Indicator of Systemic Stress (CISS) provided by the ECB, aggregate prudential ratios for domestic banks for each country, stock market volatility, and our own statistical index constructed from a principal compo- nent analysis (PCA). We ﬁnd that ﬁnancial instability, captured by the CISS and non-performing loans, has a negative effect on economicperformance. This result is robust to several panel speci ﬁcations and estimators. It is interesting to note that introducing ﬁnancial stability in this framework does not alter the ﬁnancial depth ef- fect. While this result may seem intuitive, this paper provides quantita- tive evidence on the negative effect of ﬁnancial instability on economicperformance. Financial instability, independently of ﬁnancial deepening, has a negative effect on the economy.
entering the regressions significantly positive. Hence, our results support the theoretical assumption that higher levels of capital stringency are associated with higher financial soundness and prudential behavior by bank managers. Our findings that capital regulations have a positive effect on financialstability hold for both Western and Eastern European banking markets. Third, we control for governmental ownership. As expected, this variable enters the regressions negatively but becomes significant for Eastern European countries only. Hence, our results suggest that government-owned banks operating in concentrated Eastern European banking markets are more prone to financial fragility. Fourth, we include the index of economic freedom. This variable enters the regressions significantly negative for Eastern Europe but significantly positive for Western European countries. Accounting to this result and with regard to theoretical assumptions, we propose that larger banks in Western Europe may predominantly use greater freedoms to improve efficiency and risk diversification, whereas Eastern European banks seem to exploit greater freedoms to undertake greater risks, particularly if existing regulations promote risk-taking incentives. Finally, we separately control for the origin of the judicial systems several studies from the “law and finance” research field stress the linkage between the origin of a country’s judicial system and financial sector development, e.g. protection of creditor rights (La Porta et al., 1998). We find that concentrated banking markets in countries with a soviet legal origin (all Eastern European countries) are more likely to be fragile whereas a French legal origin positively affects financialstability.
This paper examines whether multinational banks have a stabilising or a destabilising role during times of financial distress. With a focus on Europe, it looks at how these banks’ foreign affiliates have been faring during the recent financial crisis. It finds that retail and corporate lending of these foreign affiliates has been stable and even increasing between 2007 and 2009. This pattern is related to the functioning of the internal capital market through which these banks funnel funds across their units. The internal capital market has been an effective tool to support foreign affiliates in distress and to isolate their lending from the local availability of financial resources, notwithstanding the systemic nature of the recent crisis. This effect has been particularly large within the EU integrated financial market and for the EMU countries, thus showing complementarity between economic integration and multinational banks’ internal capital markets. In light of these findings, this paper supports the call for an integration of the European supervisory and regulatory framework overseeing multinational banks. The analysis is based on an analytical framework which derives the main conditions under which the internal capital market can perform this support function under idiosyncratic and systemic stresses. The empirical evidence uses both aggregate evidence on foreign claims worldwide, and firm- level evidence on the behaviour of banking groups’ affiliates, compared to standing alone national banks.
Investment has been the cementing element of EU integration, institutions and policies – in brief, in creating more Europe. More concretely, investment in people, in knowledge and in physical assets, to ensure that Europe preserves its role and position in the world. The current crisis transcends national, even continental borders. Europe is reminded of its severity on a daily basis. Record unemployment is one of the consequences; shrinking public budgets and financial austerity another. In the run-up to the current recession investment grew by 5-6% a years. Exporters and home buyers drove this expansion, which ended in 2008. Since then, the lack of investment has been a main source of demand weakness in the European Union.
In the long run and with a more widespread conversion to organic farming, relative profits and the criteria of profit maximisation are becoming more important for analysing the economicperformance of organic farming. In this report, organic farming will be called economically profitable if the profits are higher than those of other possible activities. Thus, organic farming is economically profitable if the return to the production factors used exceeds their opportunity costs. While there are a large number of possible uses for most production factors, and many analyses on the economics of agriculture have tried to compare the income from farming to incomes in other sectors of the economy, here the emphasis is on the comparison with other management practices. The underlying argument is that the focus of the study is on the agricultural sector and on the use of production factors that are nearly exclusively used by agriculture, like agricultural land. Therefore, the opportunity costs are defined by alternative agricultural non-organic land uses.
The negative effects from contagion only have the potential to outweigh the positive stabilising effects in the presence of some mechanisms that propagate either the magnitude or the costs of spillovers (as otherwise the considerations of standard portfolio theory apply). Such propagation mechanisms can be due to coordination problems (such as suggested by the global games literature, eg, see Goldstein and Pauzner, 2004, Dasgupta, 2004, and Goodhart and Schoenmaker, 2009), because of deficiencies in cross-border resolution (eg, see Claessens, Herring and Schoenmaker, 2010), spillbacks from risk transfer (see Allen and Carletti, 2006) and higher costs of systemic crisis (see Wagner, 2010a). However, the results of the literature are still inconclusive and derived in rather specific contexts. It is therefore less clear how important these mechanisms are and whether they can overturn the general desirability of cross-border banking and integration due to diversification gains. More research in this area is needed. While we have previously pointed out that cross-border banking can have positive effects for stability by fostering competition in the lending market, the channel going through competition can also go the other way around. A key argument in this respect is the franchise value hypothesis (see, among others, Keeley, 1990; Allen and Gale, 2000a; Hellman, Murdock and Stiglitz, 2000; and Repullo, 2004). Its basic idea is that when banks compete more intensely for deposits, deposit rates rise and lending rates fall. This leads to an erosion of their franchise value. Banks have then less to lose from a default and their incentives to take on risk increase. Thus, essentially the same mechanism that operates at the firm-level and is stability enhancing, also operates at the bank-level and is detrimental to stability.
Apart from the gold standard, economic policy barely existed. There was little belief that governments could, or should, prevent business slumps. These were seen as natural, therapeutic, and self-correcting. The lower wages and interest rates caused by slumps would spur recovery. The 1920-21 downturn (when industrial production fell 25 percent) had preceded the prosperous twenties. "People will work harder, live a more moral life," Andrew Mellon, Treasury secretary under President Herbert Hoover, said after the depression started. "Enterprising people will pick up the wrecks from less competent people," he claimed. One exception to the hands-off attitude was the Federal Reserve, created in 1913. It was charged with the responsibility for providing emergency funds to banks so that surprise withdrawals would not trigger bank runs and a financial panic.
The recent financial crisis of 2008 has shed some light on the vulnerabilities and fragilities of the conventional banking system. Major banks went bankrupt in Europe as well in the US. There were runs on mainstream banks rarely seen since 1920s and 1930s. Bank lending decreased sharply (Ivashina and Scharfstein (2010)). The global financial system suffered a meltdown. Funds provided for bailouts of too-big-to-fail banks lead to the deterioration of public finances in Europe and the European response of fiscal consolidation and austerity lead to a further worsening of inequality across Europe (Kaltenbrunner, Dymski, Szymborska (2015)). Major factors in the evident instability of the conventional banking system are the increasing financialisation, liberalization and globalization of financial markets.
Focusing on standard performance measures, we can see that social banks present a credible alternative to standard banks. Taking social, environmental and sustainability goals into account, the case for social banks is likely to be more pronounced. From an European perspective, there is a large potential in social banking. Although the social banking sector is relatively small, for example, social banks reach less than 1 % of all possible banking customers in Europe (Remer (2014), p. 268), social banks have experienced some success in increased numbers of consumers and profitability (Hayday (2014)). Many social banks are now associated with organizations like the European Federation of Ethical and Alternative Banks (FEBEA), the Global Alliance for Banking on Values (GABV) (Niven (2014)), the Institute for Social Banking, Institute for Social Banking (ISB) and International Association of Investors in the Social Economy (INAISE). It is clear that social banks have an important role to play in the future of the European banking industry (Dymski and Kaltenbrunner (2014)).
Similarly, during the 1960s and 1970s, each time interest rate ceilings on deposits in the US became binding, an enormous volume of dollar deposits shifted from the US to Eurodollar centers. When US bank customers found they could not roll-over their Certificates of Deposit in US banks at the market rate of interest, they simply transferred their deposits to Eurobanks -- often shell branches of their American banks -- but, located beyond the reach of interest-rate ceiling regulations. Examples of this phenomenon are easy to find throughout Europe. In 1988 approximately $10.7 billion of German investment funds flowed into the Luxembourg bond market following the announced imposition of a German 10% withholding tax to be made effective January 1989. Likewise, the establishment of organized markets for derivative instruments has been so inhibited in Germany by the interpretation of gambling laws that most futures trading in German government bonds has taken place in London. Similarly the imposition of a transfer tax in the Swedish market caused market activity to relocate in London. The tax mainly succeeded in relocating market activity rather than in raising revenue for the government or dampening volatility in market prices.
The influx of capital flows to emerging economies continues against a background of rising global liquidity supported by robust economic and financialstability. Rapid financial and economic integration as witnessed during the past two decades has supported the development of SEACEN member countries. The SEACEN region has increasingly become important not only as a supplier of goods and services of world demand but also as an alluring destination for global investment. During the past three years (Table 1.1), at least one-third of the total private capital flows target emerging Asia, marginally lower than private flows to emerging Europe. The combination of better domestic economic fundamental and financialstability with the rise in global liquidity, innovation of new financial instruments, and a wider international investment base, has become major factors in explaining the rising capital flows in recent years. It is likely that the influx of capital flows to emerging economies will continue in the foreseeable future as ample global liquidity continue searching for higher yield together with the rising hedge fund activities. The inflows may flourish the domestic economy and reduce the yield spread as demand for emerging market bonds increase amidst global excess liquidity. Nevertheless, the inflows have also resulted in concerns for export competitiveness and the susceptibility of the economy to sudden capital reversal.
How do financial market conditions impact on real economicperformance? This question has been examined at least since Schumpeter (1911) and regained particular relevance after the global financial crisis that started in 2008. Rajan and Zingales (1998, henceforth RZ) achieved significant progress towards establishing a causal effect of financial development on real growth by exploiting differences in external financial dependence (EFD) across industries. RZ measure industry-level EFD as the share of investment not financed by internal cash flow in the median listed U.S. firm. Their approach rests on two main assumptions: First, if the U.S. capital market is close to perfect, credit demand by listed U.S. firms should not be contaminated by supply- side imperfections, but instead reflect technological fundamentals. 1 Second, in applying the EFD index of U.S. industries to other countries, RZ assume that the industry ranking is constant across countries. It is the second assumption that we seek to test in this letter.
There is growing evidence of international divergence in the performance of new industries. While the United States is at the forefront of the recent revolution in information technologies, European economists and policy makers are concerned that Europe is falling behind with negative implications for long-term economicperformance. This paper investigates the role of financial systems as a crucial determinant of apparent differences in national abilities to promote innovative activities in specific sectors. Firstly, a short overview of the relevant finance and innovation literature is provided, and a synthetic view of the finance-innovation link is sketched. It is argued that national financial systems have an impact on the structure of growth through their differing abilities to promote innovation in sector-specific technology regimes. Secondly, I apply a simple econometric model to a data set consisting of 17 OECD countries and 20
severely punished as the economic conditions of their countries worsened while they were in office. Moreover, citizens seem to have perceived worsening economic conditions as a greater failure of the incumbent party as the crisis progressed, since a one unit increase in misery is associated with a greater punishment of the incumbent party in the second post-crisis election. Governments elected after the outbreak of the Great Recession which failed to redress the economic situation of their countries were more severely punished than governments that happened to be in office in hard hit countries when the Great Recession began. By contrast, in CEE there are no statistically significant differences between the pre and post-crisis periods, and some of the coefficients suggest that misery may even have had a more limited impact on the performance of incumbent parties during the post-crisis period. To further assess the differences between CEE and WE we pool our data and specify a three-way interaction between the misery indicator, the timing of the election, and the region 8 . Figure 1 summarizes these results and confirms that during the crisis there is a closer relationship between economicperformance and incumbents’ support in WE. Although none of the coefficients is statistically significant, the three-way interaction coefficients are correctly signed, indicating a lower importance of the economic conditions during the crisis in CEE.
Despite emerging evidence that stable banking institutions are essential to promoting institutional performance and economic growth; the IMF (2017) report indicates that commercial banks in South Sudan are faced by a myriad of internal challenges as well as macroeconomic constraints that have limited the development within the sector resulting in the conclusion that the banks are failing as indicated by the financial soundness indicators utilized by the Central Bank of South Sudan. According to Bank of South Sudan, (2013) report on the South Sudan Financial sector the shift from Islamic to Conventional Banking after the independence of South Sudan in 2011 led to imbalances in the structuring of a new financial system. Garang (2014) also indicates that there has been limited growth in the South Sudan banking sector; further he stated lack of financial inclusivity and institutional structuring to be the cause of limited development and performance of the sector.
On a similar note, the Supervisory Capital Assessment Program (SCAP), or better known as the bank ‘stress test’, was undertaken in the United States from February to May 2009. 4 The SCAP applied a common, probabilistic scenario analysis of the participating banks but it looked beyond the traditional accounting-based measures to determine the needed capital buffer. A key objective of SCAP is to critically examine the feedback loops between the banking institutions’ financial standings, their anticipated behaviour and the real macroeconomic activities (Hirtle,et.al. (2000)). Thus, SCAP highlighted the importance of investigating different institutions simultaneously based on prospective economic conditions: i.e., examining overlapping micro and macro- prudential concerns. The programme required the banks to project losses, revenues, and loan loss reserve needs over a two-year, forward looking horizon under two economic scenarios. The first scenario reflects consensus expectations (or the baseline scenario), while the second one is a ‘more adverse’ scenario that assumed substantially worse macroeconomic performance than the baseline.
The study of the current approaches to determining the integral enterprise stability indicator revealed the following regularities. First, most of the authors follow the concept of stability evaluation in determining the indicator and eliminate the issues of stability level forecasting in a given period. Though some authors refer to the existing indicators dynamics, which should be considered in the space- time continuum, however, the proposed calculation models, based on simulation and mathematical methods, do not allow predicting the indicator level in the future. This approach is observed in almost 88% of the studied works. The authors of such works are: V. Bor, L. Irkhina, E. Kazyuka, E. Slabinskiy, A. Babich, P. Nefedov, D. Yunusova, B. Shchurov, M. Dmitriev, T. Saakyan, and others. Only 12% of the scientific approaches to determining the integral stability coefficient include tools for forcasting financial and economic situation at the enterprise in the context of stability for future periods. Such authors are: Yu. Suleymanova, I. Pavlova, A. Shmidt.
This paper analyzes the inflation targeting policy in emerging economies. More specifically, the development of this work aims to study the conduct, effectiveness and performance of this monetary policy strategy in a context of instability. Taking into account the financial collapse of 2008 and 2009 that has produced the worst global recession since the 1930s. We are developing an econometric approach based on the estimation of the efficiency frontier: Variability of inflation - variability of output, which allows us to deduce measures of economicperformance and measures of the efficiency of monetary policy. Our results show a significant difference within the macroeconomic performance in a global economic environment characterized by an international financial crisis. We show that these differences are generally due to the choice of this monetary policy strategy.
On a similar note, the Supervisory Capital Assessment Program (SCAP), or better known as the bank ‘stress test’, was undertaken in the United States from February to May 2009. 4 The SCAP applied a common, probabilistic scenario analysis of the participating banks but it looked beyond the traditional accounting-based measures to determine the needed capital buffer. A key objective of SCAP is to critically examine the feedback loops between the banking institutions’ financial standings, their anticipated behaviour and the real macroeconomic activities (Hirtle, et.al., 2000). Thus, SCAP highlighted the importance of investigating different institutions simultaneously based on prospective economic conditions: i.e., examining overlapping micro and macro-prudential concerns. The programme required the banks to project losses, revenues, and loan loss reserve needs over a two-year, forward looking horizon under two economic scenarios. The first scenario reflects consensus expectations (or the baseline scenario), while the second one is a ‘more adverse’ scenario that assumed substantially worse macroeconomic performance than the baseline.
There is an explicit significance of regulatory variables when they are assessed individually notwithstanding official supervision enters with no explanatory power. Once we plug them all in the model their compound effect turns out to be significant at 1% level. Significance of activity restrictions 11 denotes that managers are restricted to enter other non-traditional business lines for diversification purposes, taking on more risks and exacerbating thereby their portfolio risk exposure. On the contrary, capital regulation enters significant at 1% level fostering stability to the banking sector. Hence, more capitalization makes banks immune to liquidity shocks although the opportunity cost of such a ‘tax burden’ in cases of powerful owners, constitute a considerable motive for risk taking by means of monopolistic conduct (Laeven and Levine, 2009). Similarly, foreign ownership is related to bank stability meaning that the openness to foreign institutions leads to competition and profit margins due to the adoption of better practices that enhance further operational performance. Bank soundness peters out as official supervision becomes more stringent on the grounds that some degree of corruption in lending activities undermines systemic efficiency (Beck et al., 2006b). Last, private monitoring is highly significant with a negative bearing on banking system stability despite the fact that too-big-to-fail banks have been subject to close monitoring and inspection due to their potential systemic repercussions. Hence, there is a motive for excessive risk-taking among incumbent banks without hampering the effect of concentration.