Download - Financial Sector Reform
Financial Sector ReformFinancial Sector Reform
Sergio Schmukler
Rethinking Structural Reform ConferenceFederal Reserve Bank of Atlanta
Inter-American Development BankOctober 2003
Discussion on Discussion on Bekaert, Harvey and Lundblad Bekaert, Harvey and Lundblad
Galindo and MiccoGalindo and Micco
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Discussion OutlineDiscussion Outline1. Reform agenda: logic and scope
Broader than these papersBroader than financial sector reforms
2. Outcomes for Latin America: mixed or disappointingExtensive to other regionsNot as predicted by these papers
3. If reforms did disappoint, why?Policy alternatives to these papers’ recommendations
4. Liberalization papers
5. Creditor rights paper
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1. Reform Agenda: Logic1. Reform Agenda: LogicGenerate more and cheaper financing
BANKS(fragile and inefficient)
CAPITAL MARKETS
FIRMS
Increased competition
Cheaper financing
INVESTORS
Higher returns
Wider set of instruments
More financing
GOVERNMENT
Supervision and regulation
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•Depository and clearing•Trading platforms
•Pension funds•Mutual funds•Insurance companies
1. Reform Agenda: Logic1. Reform Agenda: LogicSweeping reforms throughout financial sector
CAPITAL MARKETS SUPPLY
•Financial liberalization
DEMAND
•Privatization•Tax incentives
Long-term financing and specialization
Lower transaction costs
Improve exchange infrastructure
Foreign capital
available
Increase liquidity
•Supervisory agency•Investor protection
Mitigate information and agency problems
More retail investment
Promote stocks dissemination
More discipline and efficiency
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1. Reform Agenda: Actions1. Reform Agenda: ActionsFinancial liberalization increasing since late-1980s
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
Latin America: Indices of Financial Liberalization by Sector
More liberalization
0.5
1.0
1.5
2.0
2.5
3.0
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Domestic Financial Sector Capital Account Stock Market
Less liberalization
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1. Reform Agenda: Actions1. Reform Agenda: ActionsOther reforms implemented in the early-1990s
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.Sources: Bhattacharya and Daouk 2000, ICRG, and local data
Percentage of Latin American Countries that Implemented Reforms
3125
13
69 69
25
69
25
69
6
100
81
Creation of currentsupervisory agency
Establishment ofinsider trading laws
Enforcement ofinsider trading laws
Improvement in Law and Order index
Before 1990 1990-1995 1996-2001
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1. Reform Agenda: Actions1. Reform Agenda: ActionsReforms occurred mostly after liberalization
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.Sources: Bhattacharya and Daouk 2000, Kaminsky and Schmukler 2001, and ICRG
Sequencing: Financial Liberalization and Institutional Reforms
Law and OrderInsider Trading Laws -
ExistenceInsider Trading Laws -
Enforcement
Partial Liberalization 0.0 14.3 0.0
Full Liberalization 28.6 71.4 14.3
Probabilities of Liberalization Conditional on
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2. But Results Not as Expected2. But Results Not as Expected
(Reforms are good according to these papers)
Equity marketsVisible growth (market cap), but not as in OECDRising concentration and delistingMigration to international equity markets
Small relative to bond markets
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2. But Results Not as Expected2. But Results Not as ExpectedBond markets
Dominated by government paperDollarizationShort durationCurrency and maturity mismatches
Institutional investorsFast growth but tapped by governments
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2. But Results Not as Expected2. But Results Not as ExpectedLatin America Equity Market Growth Is Poor
Stock Market CapitalizationPercentage of GDP
0
25
50
75
100
125
150
1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999
Latin American countriesAsian countriesG-7 countries
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
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2. But Results Not as Expected2. But Results Not as ExpectedStock Exchanges Affected by Increasing De-listing
Domestic Stock Exchanges: Number of Companies
Source: IFC's Emerging Markets Database
0
100
200
300
400
500
600
Argentina Brazil Chile Colombia Mexico Peru Venezuela
1990 1995 2000
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2. But Results Not as Expected2. But Results Not as ExpectedLarge Companies Migrate to International Markets
Latin American Companies: Value Traded
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
USD Millions
0
50,000
100,000
150,000
200,000
250,000
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Internationalized companies in international marketInternationalized companies in domestic marketDomestic companies
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2. But Results Not as Expected2. But Results Not as ExpectedEquities Traded Belong to a Handful of Large Firms
PercentageStock Market Concentration (end-2000)
Source: IFC's Emerging Markets Database
0
10
20
30
40
50
60
70
80
Arg
entin
a
Braz
il
Chi
le
Col
ombi
a
Mex
ico
Peru
Ven
ezue
la
Hon
g K
ong
Mal
aysi
a
Thai
land
Japa
n
U.K
.
U.S
.
Share of trading of top ten companies
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2. But Results Not as Expected2. But Results Not as ExpectedPublic Bond Trading Outweighs Equity Trading
Value Traded in Domestic Markets (2000)
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
68
0
2
4
6
8
10
12
14
Argentina Bolivia Colombia Ecuador El Salvador Mexico
Government bonds Equities
Percentage of GDP
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3. If Reforms Did Disappoint, Why?3. If Reforms Did Disappoint, Why?
Wrong sequencingFinancial integration went too fastImperfections in international markets lead to vulnerabilities when domestic sector is not ready Thus, follow right sequencingBut, 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 periodThus, accelerate paceBut, we all know what happens in the long run
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3. If Reforms Did Disappoint, Why?3. If Reforms Did Disappoint, Why?
Wrong expectationsRecommendations based on cross-sectional evidenceReforms did not tackle well some basic issues for EMs
Macro policySystemic risk Domestic and external shocks, e.g. capital flows volatilityInstitutional factors – size, information asymmetries, moral hazard
GlobalizationThus, redesign reform to address the basic issues, and revise expectationsBut, many of these issues are intrinsic to emerging markets and solving them is a daunting task
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4. Liberalization Papers4. Liberalization Papers
Great papers!
Important contributionsWelfare implications relative to previous workGrowth mean and volatilitySolid workAlmost 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
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4. Liberalization Papers4. Liberalization PapersPotentially 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 stocksBut witness size of stock marketsAnd witness effects of capital account liberalization
Which samples/estimations make sense?Mix of developed and developing, including very poor countriesIncluding countries with no change in liberalizationTime series for emerging marketsFixed effects estimations
Coefficient diminishes to 0.56But why including countries with no variation in liberalization here?
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4. Liberalization Papers4. Liberalization Papers
Potentially relevant issues to consider (continued)More on econometrics
Overlapping observationsHow 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 arbitraryCrises as outliers? Rationale?Why including 99 and 00?Perhaps, crises consequence of liberalization, as suggestedEven with crises, other evidence points towards lower volatility
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4. Liberalization Papers4. Liberalization Papers
Caveats related to liberalization measuresWider set of financial liberalization measuresPace of liberalizationReversalsIntensity of liberalizationCapital account liberalization
Might seem more important to many readersTreatment of capital account liberalization
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4. Liberalization Papers4. Liberalization Papers
Other specific pointsMore on economic significance would be welcomedResults weakened with other controlsFor LAC countries, mean results insignificantOther regressors
Other controls, like GDP per capitaLevel of inflation might matter
Risk sharing Perhaps, could be another paper
Ability versus actual risk sharing
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5. Creditor Rights Paper5. Creditor Rights Paper
Great paper!
Important points of the paperEffectiveness of creditor rights, interacted with
With rule of lawWith efficiency of the judiciaryWith small and medium firms
Perhaps nicest results
Three effects of creditor rightsCredit/GDPShare of bank credit financing of small and medium firmsChange in real credit (procyclicality)
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5. Creditor Rights Paper5. Creditor Rights Paper
Potentially relevant issues to considerMore consistency across empirical analysis Creditors rights, rule of law, or broad institutions?
No multivariate analysis, omitted variablesOnly done very partially for change in credit, when controlling both for creditor rights and rule of lawPerhaps, 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?
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5. Creditor Rights Paper5. Creditor Rights Paper
Potentially relevant issues to consider (continued)Why procyclicality?
Risk can be reduced ex-ante, knowing state of institutionsMore explanation would be welcomed
Policy recommendationsCross section evidence versus time series recommendation
More reforms neededForeign jurisdictionsSystemic shocks and creditors right
Repudiation of contractsShocks to collateralIn fact, acknowledged importance in institutional analysis
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5. Creditor Rights Paper5. Creditor Rights Paper
More on data and variablesMacro variables not significant, except budget deficitWEBS survey
Only for 1999Share of investment financed with bank credit and legal protection
What about other type of financing
Other specific pointEconometrics
Procyclicality results weak using IVsClustering standard errors