Abstract
The previous two sections have dealt with the main elements of transformation studies and the financial liberalization hypothesis. This section attempts to integrate these two approaches into a framework for the liberalization of the banking sector.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
Fry (1997), p. 768f.
Wachtel (2001), p. 357.
See McKinnon (1991), p. x.
See Brandt and Li (2003), p. 387; Lago (2002), p. 4 and p. 9.
See Fry (1989), p. 26; Fry (1997), p. 759; McKinnon (1991), p. 4.
See Beck (2006), p. 7; Funke (1993), p. 347; Koch (1998), p. 70.
See Deckert (1996), p. 36; Fry (1997), p. 759; Funke (1993), p. 347; McKinnon (1991), p. 4.
See Bonin and Wachtel (1999), p. 94f.; Caprio, Atiyas and Hanson (1993), p. 12; Deckert (1996), p. 37; Fry (1989), p. 26; Fry (1997), p. 759.
See Caprio, Atiyas and Hanson (1994), p. 434f.; Mehran and Laurens (1997), p. 33f.
See for example Roland (2001), pp. 44–46 for a discussion.
See Lau, Qian and Roland (2000), p. 121.
See Caprio, Atiyas and Hanson (1994), p. 421.
See Joshi and Little (1997), p. 125.
See Balcerowicz and Gelb (1994), p. 37f.; Bonin and Wachtel (1999), p. 94f.; Buiter, Lago and Rey (1999), p. 157; Kaminsky and Schmukler (2002), p. 25.
See Balcerowicz and Gelb (1994), p. 37f.; Sheng (1996), p. 46.
This strategy has been advocated especially for economies in transition where both banks and enterprises are state-owned. Canceling the debt from banks’ and enterprises’ balance sheets would remove a burden from the old regime that has no effect on the value of state-owned assets. See Mitchell (2000), p. 64.
See Balcerowicz and Gelb (1994), p. 38; Bonin and Wachtel (1999), p. 94 and p. 98; Buiter, Lago and Rey (1999), p. 159; Caprio, Atiyas and Hanson (1993), p. 22.
See for example Barth, Caprio and Levine (2000), p. 7f.; Hawkins and Mihaljek (2001), p. 9; La Porta, Lopez de Silanes and Schleifer (2002), p. 267.
See Bonin and Wachtel (1999), p. 93f.; Funke (1993), p. 353; Hawkins and Mihaljek (2001), p. 9; Williams and Nguyen (2005), p. 2148f.
See Commander, Dutz and Stern (1999), p. 358.
See Bonin and Wachtel (1999), p. 93f.; Megginson (2005), p. 1961.
See Bonin, Hasan and Wachtel (2005), p. 2172; Boubakri et al. (2005), p. 2018; Clarke, Cull and Shirley (2005), pp. 1914–1918; Hawkins and Mihaljek (2001), p. 11; Megginson (2005), p. 1961; Otchere (2005), p. 2090f. As previously discussed in section 5.3.3, the view that the government should fully divest its holdings is not undisputed since continued government ownership can serve as an incentive for the government to pursue policies that do not reduce the value of its holding.
See World Bank (2001), p. 16f.
See Parker and Kirkpatrick (2005), p. 531.
See Stiglitz and Bhattacharya (1999), p. 106.
See Bandiera et al. (2000), p. 242.
The institutions for the banking sector are embedded in the overall institutional framework of the economy. Therefore, institutions like a functioning legal system or well-defined property rights to have enforceable claims need to be in place as well. See Claessens (1996), p. 5; Stiglitz (1989a), p. 61.
See Kormendi and Snyder (1996), p. 11; Rajan and Zingales (2003a), p. 18.
See World Bank (1997b), p. 69.
See Honohan and Stiglitz (2001), p. 42; Stiglitz and Bhattacharya (1999), p. 106.
See Joshi and Little (1997), p. 116.
See Fry (1989), p. 25; Honohan (1997), p. 19; Mishkin (1996), p. 56.
See Freixas and Rochet (1998), p. 247; World Bank (2001), p. 94.
See Honohan (1997), p. 6; Joshi and Little (1997), p. 116.
See Joshi and Little (1997), p. 115.
See Bonin and Wachtel (1999), p. 121; Honohan (1997), p. 19; Mishkin (1996), p. 56.
In a database on the use of deposit insurance, a World Bank study found 68 countries with explicit deposit insurance in 2000. See Demirgüc-Kunt and Sobaci (2000), p. 9. Countries not having explicit deposit insurance systems are most likely having some form of implicit insurance due to banks that are considered “too big to fail” or public expectations that depositors will be shielded from losses by the government. See Diaz-Alejandro (1985), p. 13.
See Aschinger (2001), p. 66; Bossone (2000), pp. 35–37; Diamond and Dybvig (1983), p. 417; Diaz-Alejandro (1985), p. 4f.; Freixas and Rochet (1998), p. 272; Hermes and Lensink (2000), p. 516; Lago (2002), p. 7.
See Bonin and Wachtel (1999), p. 95.
Bonin and Wachtel (1999), p. 118.
See Ellman (1997), p. 27; World Bank (1996b), p. 98f.
See Caprio, Atiyas and Hanson (1993), p. 22; Commander, Dutz and Stern (1999), p. 357; World Bank (1996b), p. 99.
See Claessens (1996), p. 2; World Bank (1996b), p. 99.
World Bank (2001), p. 20f.
See Demirgüc-Kunt (2006), p. 27; Micco, Panizza and Yanez (2004), p. 6.
See Detragiache, Tressel and Gupta (2006), p. 26; Gormley (2006), p. 27.
See Bonin and Wachtel (1999), p. 95; Caprio, Atiyas and Hanson (1994), p. 435; World Bank (2001), p. 21.
See Barton, Newell and Wilson (2003), p. 27; Wyplosz (2001), p. 3.
See Demirgüc-Kunt and Detragiache (1998), p. 36.
See Funke (1993), p. 348.
In developing countries the reform of the domestic financial system can start earlier than in transition countries because the scope of reforms is narrower. While reforms in developing countries are mostly about liberalization of financial markets, transition countries have to pursue more basic reforms that include for example the creation of institutions. See Funke (1993), p. 346f.
See Brownbridge and Kirkpatrick (2000), p. 12f.; Gibson and Tsakalotos (1994), p. 579; McKinnon (1991), pp. 6–8; Mehran and Laurens (1997), p. 34.
See Laeven (2003), p. 18.
For a summary of general political-economy factors affecting reforms see for example Williamson and Haggard (1994). Roland (2002) and Wagener (1993) provide an overview of political-economy factors in transition countries, while Denizer, Desai and Gueorguiev (1998) focus on the political-economy of financial repression, and Boehmer, Nash and Netter (2005) investigate political and economic factors for bank privatization.
See Nsouli, Mounir and Funke (2002), p. 25; Opper (2004), p. 571; Roland (2002), p. 45.
See Abiad and Mody (2002), p. 12; Acemoglu and Robinson (2000), p. 126f.; Alesina and Drazen (1991), p. 1171; Fernandez and Rodrik (1992); Opper (2004), p. 569f.; Rajan and Zingales (2003a), p. 19f.; Zhang (2003), p. 70f.
See Quispe-Agnoli and McQuerry (2001), p. 12.
See Williamson and Mahar (1998), p. 4.
For example in 1989–1990 India had over 50 administered lending categories and a large number of stipulated interest rates that depended on loan size, usage and type of borrower. See Joshi and Little (1997), p. 130.
For the classification see also Abiad and Mody (2002), p. 5 footnote 4.
See Fry (1997), p. 755f.; McKinnon (1973), p. 69; Williamson and Mahar (1998), p. 48f.
In the McKinnon-Shaw models the assumption is made that statutory preemptions reduce available funds for investments since they are used to finance government consumption. However, there are also models that assume that the funds from reserve requirements are channeled to development finance institutions that extend loans to projects in which banks would not invest. Under these circumstances and assuming that loan demand is not perfectly interest-rate elastic, it is possible to find a deposit-maximizing required reserve ratio. For a discussion see Fry (1995), pp. 133–150.
See Williamson and Mahar (1998), p. 8. The formula using the line numbers of the International Financial Statistics is (14-14a)/(34+35-14a).
See Demetriades and Luintel (1997), p. 314. This does not preclude that government-owned policy banks hand out subsidized credit to priority sectors.
For example for the 1974–1999 period in India, Ganesan (2003) calculates size-able income losses for banks due to directed credit. See Ganesan (2003), pp. 23–26.
See Santos (2000), p. 17.
See Rojas-Suarez (2001), pp. 2–4.
See Barton, Newell and Wilson (2003), pp. 53–55. The authors add high growth rates of the loan portfolio in relation to the growth rates of the real sector and capital adequacy ratios. The growth rate of the loan portfolio is not used in this analysis since the necessary sectoral data is not available. Capital adequacy ratios are not included as a result indicator since they are already used as a process indicator.
These two approaches resemble those used by La Porta, Lopez de Silanes and Schleifer (2002). The author’s calculate the extent of state ownership for both approaches, and find that the two are highly correlated (above 90%). See La Porta, Lopez de Silanes and Schleifer (2002), p. 269f. Therefore using the second indicator alone should not result in an undue loss of information.
See Megginson (2005), pp. 1937–1941 for a discussion of the empirical evidence of the effects of state ownership of commercial banks.
See La Porta, Lopez de Silanes and Schleifer (2002), p. 278 and p. 290.
A case in point is the Chinese banking system where prior to the 1979 reforms banks handed out loans that were effectively grants; NPL recognition was consequently not an issue. See Lau (1999), p. 73f.
Second-order effects of improved institutional quality are higher levels of investment and growth. See Aron (2000), p. 128f.
The Herfindahl index is calculated by taking the sum of the squares of all banks, while the M-concentration ratio is the sum of the market shares of the largest banks, with “M” indicating the number of banks included. See International Monetary Fund (2002), p. 78. Lifting of entry barriers can also affect interest rates. However, since the opening of the sector affects lending and deposit rates differently, it is not possible to specify the effects on the net interest margin ex-ante. See Chan and Hu (2000), p. 442.
This follows the approach of Abiad and Mody (2002). While the classification is to a certain extent subjective, it allows the comparison of different countries and policy environments.
See Bandiera et al. (2000), p. 242f.
Bator (1958), p. 351.
See Freebairn (1998), p. 67.
Balcerowicz (1995), p. 174.
See Stiglitz (1994), p. 39.
From banks’ point of view, screening of projects would be a substitute to collateral. Banks however cannot recoup the cost of projects that were screened and rejected. Consequently, they will under-invest in project screening. See Manove, Padilla and Pagano (2001) for a discussion.
See Joshi and Little (1997), p. 135; Stiglitz (1994), p. 30 and p. 42; Vittas (1991), p. 5. Stiglitz and Weiss (1981) show that credit rationing can occur if the profit maximizing interest rate for the bank is below the market clearing interest rate. See Stiglitz and Weiss (1981), p. 394. Coco (2000) points out that the existence of collateral is only a necessary, but not a sufficient condition to overcome credit rationing. Factors such as the type of competition, the amount of collateral or the possibility to screen projects are also important. See Coco (2000), p. 209.
See Besley (1994), p. 31f.
See Joshi and Little (1997), p. 126f.; Stiglitz (1989b), p. 202.
See Vittas (1991), p. 6.
Agriculture accounted for about 22% of GDP in India and 15% in China in 2003. See Deutsche Bank Research (2005), p. 3.
See Naastepad (2001), p. 500. There are different reasons for credit rationing for small-scale industries and agriculture. As previously mentioned, the problem for small-scale industries is one of asymmetric information between borrower and lender, and lack of collateral. For agriculture the lack of collateral and the non-diversifiable exposure to (weather) shocks are the main issues. See Naastepad (2001), p. 479f.
See Reserve Bank of India (2004a), pp. 115–120. Rs 2 lakh are about 3,400 EUR and Rs 5 lakh about 8,500 EUR (based on an exchange rate of 58.54 Rs/EUR as of June 30th 2006).
See Government of India (1998), p. 26.
See Brownbridge and Kirkpatrick (2000), p. 15; Caprio, Atiyas and Hanson (1994), p. 422; Honohan (1997), p. 20; Rojas-Suarez (2001), p. 35.
See World Bank (1997b), p. 69.
See Hawkins and Mihaljek (2001), p. 15; Krahnen and Schmidt (1994), p. 80.
For example, 70% of farmers with landholding below one acre do not have a bank account and 87% do not have access to formal credit and as a consequence have to resort to informal sources such as moneylenders. See Srivastava and Basu (2004), p. 9.
See Srivastava and Basu (2004), p. 9f. This is highlighted by the distribution of bank branches in India (Figure 40). While the SBI and the other nationalized banks have 40% of their branches in rural areas, the Indian private sector banks with their much smaller branch network had only 18% of their branches in rural areas and the foreign banks none at all.
See Srivastava and Basu (2004), p. 16. The linkages between banks, microfinance institutions and self-help groups are exemplified well by ICICI Bank’s program in Tamil Nadu. See Prahalad (2005), pp. 302–312. For an overview of the importance of informal finance in India and China see Tsai (2005).
The endogenous growth theory provides a further argument for state-owned banks and more specifically branching requirements. Based on the endogenous growth theory, financial deepening can increase the growth rate of the economy. Therefore, the social return of providing banking services to underserved regions can exceed the private return of the respective bank so that branching requirements can help to reduce a market failure. See Sen and Vaidya (1997), p. 43 footnote 4.
See Tsai (2005), pp. 127–135.
Even if state-owned banks are regarded as a temporary second-best solution, they should be subjected to the same supervisory standards and prudential regulations as private-sector institutions to mitigate some of the downsides of state-ownership. See Hawkins and Mihaljek (2001), p. 15.
See Rodrik (2000), p. 93.
See Stiglitz (1994), p. 45f. Another argument against too much competition especially from foreign banks is a variation of the infant industry argument according to which small domestic banks may be at a disadvantage against large foreign banks. See Stiglitz (1994), p. 49.
See World Bank (1989), p. 31. The ICOR is the investment ratio divided by the real growth rate; it is calculated as (Gross fixed capital formation1 / GDP1)/ (GDP1 / GDP0-1). It measures the investment needed for an additional unit of GDP growth.
See King and Levine (1993), p. 718; Wachtel (2001), p. 342.
Rights and permissions
Copyright information
© 2008 Physica-Verlag Heidelberg
About this chapter
Cite this chapter
(2008). Framework for banking sector liberalization. In: Banking Sector Liberalization in India. Contributions to Economics. Physica-Verlag HD. https://doi.org/10.1007/978-3-7908-1982-3_6
Download citation
DOI: https://doi.org/10.1007/978-3-7908-1982-3_6
Publisher Name: Physica-Verlag HD
Print ISBN: 978-3-7908-1981-6
Online ISBN: 978-3-7908-1982-3
eBook Packages: Business and EconomicsEconomics and Finance (R0)