Augusto de la Torre

Bank Involvement with SMEs: Beyond Relationship Lending

The conventional wisdom in academic and policy circles argues that, while large and foreign banks are generally not interested in serving SMEs, small and niche banks have an advantage because they can overcome SME opaqueness through relationship lending. This paper shows that there is a gap between this view and what banks actually do. Banks perceive SMEs as a core and strategic business and seem well-positioned to expand their links with SMEs. The intensification of bank involvement with SMEs in various emerging markets is neither led by small or niche banks nor highly dependent on relationship lending. Moreover, it has not been derailed by the 2007-2009 crisis. Rather, all types of banks are catering to SMEs and large, multiple-service banks have a comparative advantage in offering a wide range of products and services on a large scale, through the use of new technologies, business models, and risk management systems.

The Basic Analytics of Access to Financial Services

Access to financial services, or rather the lack thereof, is often indiscriminately decried as a problem in many developing countries. The authors argue that theproblem of accessshould rather be analyzed by identifying different demand and supply constraints. They use the concept of an access possibilities frontier, drawn for a given set of state variables, to distinguish between cases where a financial system settles below the constrained optimum, cases where this constrained optimum is too low, and-in credit services-cases where the observed outcome is excessively high. They distinguish between payment and savings services and fixed intermediation costs, on the one hand, and lending services and different sources of credit risk, on the other hand. The authors include both supply and demand side frictions that can lead to lower access. The analysis helps identify bankable and banked population, the binding constraint to close the gap between the two, and policies to prudently expand the bankable population. This new conceptual framework can inform the debate on adequate policies to expand access to financial services and can serve as the basis for an informed measurement of access.

Living and Dying with Hard Pegs: The Rise and Fall of Argentina's Currency Board

The rise and fall of Argentinas currency board shows the extent to which the advantages of hard pegs have been overstated. The currency board did provide nominal stability and boosted financial intermediation, at the cost of endogenous financial dollarization, but did not foster monetary or fiscal discipline. The failure to adequately address the currency-growth-debt trap into which Argentina fell at the end of the 1990s precipitated a run on the currency and the banks, followed by the abandonment of the currency board and a sovereign debt default. The crisis can be best interpreted as a bad outcome of a high-stakes strategy to overcome a weak currency problem. To increase the credibility of the hard peg, the government raised its exit costs, which deepened the crisis once exit could no longer be avoided. But some alternative exit strategies would have been less destructive than the one adopted.

Innovative Experiences in Access to Finance: Market Friendly Roles for the Visible Hand?

Interest in access to finance has increased significantly in recent years, as growing evidence suggests that lack of access to credit prevents lower-income households and small firms from financing high return investment projects, having an adverse effect on growth and poverty alleviation. This study describes some recent innovative experiences to broaden access to credit. These experiences are consistent with an emerging new view that recognizes a limited role for the public sector in financial markets, but contends that there might be room for well-designed, restricted interventions in collaboration with the private sector to foster financial development and broaden access. The authors illustrate this view with several recent experiences in Latin America and then discuss some open policy questions about the role of the public and private sectors in driving these financial innovations.

Stock Market Development Under Globalization: Whither the Gains from Reforms?

Over the past decades, many countries have implemented significant reforms to foster domestic capital market development. These reforms included stock market liberalization, privatization programs, and the establishment of regulatory and supervisory frameworks. Despite the intense reform efforts, the performance of capital markets in several countries has been disappointing. To study whether reforms have had the intended effects on capital markets, the authors analyze the impact of six capital market reforms on domestic stock market development and internationalization using event studies. They find that reforms tend to be followed by significant increases in domestic market capitalization, trading, and capital raising. Reforms are also followed by an increase in the share of activity in international equity markets, with potential negative spillover effects on domestic markets.

Coping with risk through mismatches: domestic and international financial contracts for emerging economies

The authors argue that short termism, dollarization, and the use of foreign jurisdictions are endogenous ways of coping with systemic risks prevalent in emerging markets. They represent a symptom at least as much as a problem. These coping mechanisms are jointly determined and the choice of one of them involves risk tradeoffs. Various conclusions can be derived from the analysis. First, because of the dominance of dollar contracts over short-duration contracts, dedollarization might be much more difficult to achieve than often believed. Second, one-dimensional policies aimed at reducing currency and duration mismatches might just displace risk and not diminish it. Third, as systemic risks rise, the market equilibrium settles in favor of investor protection against price risk (through dollar and short-duration contracts) at the expense of exposure to credit risk. Finally, the option value to litigate in the event of default might explain this equilibrium outcome.

Emerging Capital Markets and Globalization: The Latin American Experience

Emerging Capital Markets and Globalization analyzes where we stand and where we are heading on capital market development. First, it takes stock of the state and evolution of Latin American capital markets and related reforms over time and relative to other countries. Second, it analyzes the factors related to the development of capital markets, with particular interest on measuring the impact of reforms. And third, in light of this analysis, it discusses the prospects for capital market development in Latin America and emerging economies and the implications for the reform agenda. This publication belongs to the Latin American Development Forum Series (LADF), sponsored by the Inter-American Development Bank, the United Nations Economic Commission for Latin America and the Caribbean, and the World Bank.

Low carbon, high growth : Latin American responses to climate change - an overview

A global financial and economic crisis of unprecedented dimensions was unfolding at the time of this writing. The urgency, immediacy, and staggering magnitude of the challenges posed by such a crisis have the potential to crowd out efforts aimed at addressing the challenges of global warming which are discussed in detail in this report. The capacity of political leaders and of national and supranational institutions to deal with major global threats is, after all, not unlimited. It would be, therefore, naive to think that the worlds ability to tackle simultaneously the breakdown of financial markets and the threats posed by global warming is free of tensions and trade offs. These two global menaces are of such far reaching implications for mankind, however, that it would be imprudent to allow the shorter term emergency of the global financial crisis and economic downturn to unduly deflect the policy attention away from the longer term dangers of climate change. The challenge clearly is to find common ground and to identify and pursue as many policies as feasible that can deliver progress on both fronts simultaneously. This is in principle possible but not easy to achieve in practice.

The Washington Consensus: Assessing a Damaged Brand

The authors analyze the Washington Consensus, which at its original formulation reflected views not only from Washington, but also from Latin America. Tracing the life of the Consensus from a Latin American perspective in terms of evolving economic development paradigms, they document the extensive implementation of Consensus-style reforms in the region as well as the mismatch between reformersx92 expectations and actual outcomes, in terms of growth, poverty reduction, and inequality. They present an assessment of what went wrong with the Washington Consensus-style reform agenda, using a taxonomy of views that put the blame, alternatively, on (i) shortfalls in the implementation of reforms combined with impatience regarding their expected effects; (ii) fundamental flawsx97in either the design, sequencing, or basic premises of the reform agenda; and (iii) incompleteness of the agenda that left out crucial reform needs, such as volatility, technological innovation, institutional change and inequality.

Capital Market Development: Whither Latin America?

Over the past decades, many countries have implemented significant reforms to foster capital market development. Latin American countries were at the forefront of this process. The authors analyze where Latin American capital markets stand after these reforms. They find that despite the intense reform effort, capital markets in Latin America remain underdeveloped relative to markets in other regions. Furthermore, stock markets are below what can be expected, given Latin Americas economic and institutional fundamentals. The authors discuss alternative ways of interpreting this evidence. They argue that it is difficult to pinpoint which policies Latin American countries should pursue to overcome their poor capital market development. Moreover, they argue that expectations about the outcome of the reform process may need to be revisited to take into account intrinsic characteristics of emerging economies. The latter may limit the scope for developing deep domestic capital markets in a context of international financial integration.