Transcript Document

Financial Levees:
Intermediation, External Imbalances, and Banking Crises
Mark S. Copelovitch
Department of Political Science &
La Follette School of Public Affairs
University of Wisconsin – Madison
[email protected]
David Andrew Singer
Department of Political Science
MIT
[email protected]
What Caused the “Great Recession”?
External imbalances and capital inflow bonanzas
• Widely seen as proximate or underlying causes (Reinhart and Reinhart
2008, Bernanke 2009, Reinhart and Rogoff 2009, Caballero 2011, Chinn
and Frieden 2011)
• Building on earlier work on crises in Latin America and East Asia (DiazAlejandro 1985, Calvo 1998, Kaminsky and Reinhart 1999)
The new conventional wisdom?
• Obstfeld and Rogoff (2009): crises and imbalances “intimately related”
• Bini Smaghi (2008): “two sides of the same coin”
• Portes (2009): “global macroeconomic imbalances are the underlying
cause of the crisis”
The Global Imbalance Chorus
Portes (2009)
• “Global imbalances…brought low interest rates, the search for yield, and an
excessive volume of financial intermediation, which the system could not
handle responsibly”
King (2010)
• “The massive flows of capital from the new entrants into western financial
markets pushed down interest rates and encouraged risk-taking on an
extraordinary scale”
Reinhart and Reinhart (2008)
• “Capital inflow bonanza periods are associated with a higher incidence of
banking, currency, and inflation crises in all but the high income countries.”
• “Episodes end, more often than not, with an abrupt reversal or “sudden
stop” a la Calvo (1998)”
Problems With the Imbalances View
Empirical anomalies
• Some countries with large current account deficits escaped the crisis
(Australia, New Zealand) while others were hit hardest (US, UK, Greece)
• No “sudden stop” in the US, despite collapse of interbank lending
• 2/3 US capital inflows came from Europe, not large surplus countries
• “Financial crises, driven by excessive loan growth, occurred by and large
independent of current account imbalances” (Jorda, Schularick, and
Taylor 2011)
– 1981-2007: weak correlation between credit booms and both current
account deficits (0.01) and bonanzas (0.11)
– Large credit booms in key surplus countries (China 1997-2000; India 2001-4;
Brazil 2003-7; Japan in 1980s; US in 1920s)
US Balance of Payments (% of GDP)
SOURCE: Borio and Disyatat 2011; Bureau of Economic Analysis
Our Argument: Consider Financial (Dis)intermediation
Global imbalances are destabilizing only under certain circumstances
• Unpacking the “current account”
– Savings minus investment: an intertemporal phenomenon
– Deficits are especially problematic when returns on investment are uncertain
• Financial sectors with low levels of securitization are resistant to the
destabilizing influences of capital inflows
– Securitization exacerbates the mispricing of risk
– Disintermediation distorts the assessment of returns on investment
Traditional banking activity acts as a “financial levee”
• Caveat: traditional banking does not prevent all crises!
– Bank credit growth is still a key determinant of financial instability
Empirical Analysis – Variables and Model Specifications
• Dependent variable = 1 if country i experiences a banking crisis in year t
– All crisis (Reinhart and Rogoff 2008/9): 375 crises (20.1%), 1981-2007
– Systemic crises (Laeven and Valencia 2008): 114 crises (2.4%), 1981-2007
• Key independent variable: Level of securitization of the financial sector
– Measured two ways:
– 1) Regulatory measure of depth/liberalization (Abiad et. al. 2008)
• Has a country taken measures to develop securities markets (0/3)?
• Is a country’s equity market open to foreign investors (0/2)?
– 2) Market/bank ratio: stock market volume / bank lending
•
Crisisit = 0 + 1 External imbalance + 2 Securitization + 3 Imbalance*Securitization
+ 4 Credit growth + 5 Regime type + 6 GDP per capita + 7 GDP growth + 8
Inflation + 9 OECD average growth + 10 Commodity prices + 11 US interest rate
+ 12 (Last crisis) + 13 (Last crisis)2 + 14 (Last crisis)3 + 
Stock market volume (shares traded) / bank lending (private credit), selected countries, 2007
Saudi Arabia
Finland
Singapore
Switzerland
India
United Kingdom
South Korea
Sweden
Russia
Turkey
Japan
United States
Australia
France
Netherlands
Spain
Indonesia
Italy
Brazil
South Africa
Germany
Israel
Canada
Mexico
Hungary
Morocco
Nigeria
Czech Republic
Thailand
Greece
Denmark
Chile
Ireland
Argentina
Kenya
Colombia
New Zealand
Croatia
Tunisia
Ecuador
Latvia
Slovak Republic
0.0
0.5
1.0
1.5
2.0
SOURCE: World Bank, Database on Financial Development & Market Structure
2.5
3.0
3.5
4.0
4.5
Interactive Marginal Effects – Banking Crisis (Reinhart-Rogoff)
Interactive Marginal Effects – Banking Crisis (Reinhart-Rogoff)
Conclusions and Next Steps
Conclusions
• Market structure conditions the impact of current account deficits on
financial stability
– Capital inflows need not be destabilizing: traditional intermediation
serves as a “financial levee”
• However: extension of bank credit – independent of the current account
balance – is a key determinant of crises
Next Steps
• Consider more directly the role of regulation
– Find (or create) better data on the scope & stringency of regulation,
and de jure vs. de facto supervisory independence & mandates
– State ownership
• Case study analysis
BACKUP
Interactive Marginal Effects – Banking Crisis (Reinhart-Rogoff)
Countries in Sample
Country
Algeria
Argentina
Australia
Bolivia
Brazil
Canada
Chile
Colombia
Costa Rica
Cote d'Ivoire
Denmark
Dominican Republic
Ecuador
Egypt
El Salvador
Finland
France
Ghana
Greece
Guatemala
Hungary
India
Indonesia
Ireland
Italy
N = 1247
Years
1981-1996
1990-2007
1981-2007
1986-2007
1994-2007
1981-2007
1981-2007
1981-2007
1981-2007
1981-2007
1981-2007
1981-2007
1981-2007
1981-2007
1981-2007
1981-2007
1981-2007
1981-2007
1981-2007
1981-2007
1991-2007
1981-2007
1983-2007
1981-2007
1981-2007
Country
Japan
Kenya
Korea
Malaysia
Mexico
Morocco
New Zealand
Nigeria
Norway
Paraguay
Peru
Philippines
Poland
Singapore
South Africa
Spain
Sri Lanka
Sweden
Thailand
Tunisia
Turkey
United Kingdom
United States
Uruguay
Years
1981-2007
1981-2007
1981-2007
1981-2007
1981-2007
1981-2007
1981-2007
1981-2007
1981-2007
1981-2007
1991-2007
1981-2007
1991-2007
1981-2007
1981-2007
1981-2007
1981-2007
1981-2007
1981-2007
1990-2007
1983-2007
1981-2007
1981-2007
1981-2007
Predicted Change in Probability of a Banking Crisis, One Standard
Deviation Increase in Current Account Deficit, by Market/Bank Ratio
30
20
10
0
10
-10
20
30
40
50
60
70
Market/Bank ratio (log), percentile
-20
-30
-40
Current account (% GDP, 5 year moving average):
increase from deficit of 1.5% to 5.4%
80
90