Erik Feyen

Benchmarking Financial Systems Around the World

This paper introduces the Global Financial Development Database, an extensive dataset of financial system characteristics for 205 economies from 1960 to 2010. The database includes measures of (a) size of financial institutions and markets (financial depth), (b) degree to which individuals can and do use financial services (access), (c) efficiency of financial intermediaries and markets in intermediating resources and facilitating financial transactions (efficiency), and (d) stability of financial institutions and markets (stability). The authors document cross-country differences and time series trends.

What Drives the Development of the Insurance Sector? An Empirical Analysis Based on a Panel of Developed and Developing Countries

The insurance sector can play a critical role in financial and economic development. By reducing uncertainty and the impact of large losses, the sector can encourage new investments, innovation, and competition. As financial intermediaries with long investment horizons, insurance companies can contribute to the provision of long-term instruments to finance corporate investment and housing. There is evidence of a causal relationship between insurance sector development and economic growth. However, there have been few studies examining the factors that drive the development of the insurance industry. This paper contributes to the literature by examining the determinants of insurance premiums (both life and non-life premiums) and total assets for a panel of about 90 countries during the period 2000-08. The results show that life sector premiums are driven by per capita income, population size and density, demographic structures, income distribution, the size of the public pension system, state ownership of insurance companies, the availability of private credit, and religion. The non-life sector is affected by these and other variables. While some of these drivers are structural, the results also show that the development of the insurance sector can be influenced by a number of policy variables.

The evolving importance of banks and securities markets

This paper examines the evolving importance of banks and securities markets during the process of economic development. We find that as countries develop economically, (1) the size of both banks and securities markets increases relative to the size of the economy, (2) the association between an increase in economic output and an increase in bank development becomes smaller, and (3) the association between an increase in economic output and an increase in securities market development becomes larger. The results are consistent with theories predicting that as economies develop, the services provided by securities markets become more important for economic activity, while those provided by banks become less important.

Bank Ownership and Performance in the Middle East and North Africa Region

Abstract Although both domestic and foreign private banks have gained ground in Middle East and North Africa (MENA) in recent years, state banks continue to play an important role in many countries. Using a MENA bank-level panel dataset for the period 2001–2008, the article contributes to the empirical literature on bank ownership and performance by documenting recent ownership trends and assessing the relations between bank ownership and performance in MENA while accounting for key bank characteristics such as size and balance sheet composition. The article is the first to analyze headline performance indicators as well as their key drivers and finds that state banks exhibit significantly weaker performance, despite their larger size and potential scale economies. This result is mainly driven by larger holdings of government securities, higher costs due to larger staffing, and larger loan-loss provisions reflecting weaker asset quality. These results seem to reflect both operational inefficiencies and policy mandates. Taken together, the results do not reject the development role of state banks, but show that their policy interventions come at a cost. As such, the article argues that there is scope to reduce the share of state banks in some MENA countries and to clarify the mandates, improve the governance, and strengthen the operational efficiency of most state banks in the region.

Benchmarking Financial Systems: Introducing the Financial Possibility Frontier

Across the world, supply for financial services rarely matches the demand, given multiple market frictions. This paper discusses the concept of the financial possibilities frontier as a constrained optimum to categorize different problems of shallow financial markets or unsustainable expansion. The paper offers three examples of how to use different data sources to apply the frontier concept to assess the state of financial systems.

Global liquidity and external bond issuance in emerging markets and developing economies

Using the universe of all externally issued bonds by corporates and sovereigns in emerging and developing economies during 2000-14, this paper analyzes various issuance trends, including the unprecedented post-crisis surge. The paper focuses on external issuance at the country-industry and individual bond levels and finds that global factors matter greatly for emerging and developing economies issuance. A decrease in U.S. expected equity market (or interest rate) volatility, U.S. corporate credit spreads, and U.S. interbank funding costs and an increase in the Federal Reserve’s balance sheet (i) raise the odds that the monthly issuance volume of a country-industry is above its historical average; (ii) decrease individual bond yields and spreads; and (iii) raise bond maturities, after controlling for country pull factors, bond characteristics (for example, type of issuer, industry, and riskiness). Additionally, we document support that the risk-taking channel of exchange rate appreciation also operates for external bond issuance. Moreover, while the paper finds that country pull factors affect the impact of global factors, it does not find consistent evidence for this across the board. This result suggests that, during loose global funding conditions, flows are mostly driven by push factors and do not systematically discriminate between emerging and developing economies. Taken together, the findings suggest that although issuers might be able to benefit from benign international funding conditions, the large issuance volumes, currency risks, and high exposure to global factors could pose external and domestic challenges for policy makers, particularly when global cycles reverse.

Finances of Egyptian Listed Firms and the Performance of the Egyptian Stock Exchange

This paper analyzes the finances of Egypts listed firms and the performance of the Egyptian stock exchange during the period 2003-07/08. Egyptian companies can be clearly divided into a top tier and a second tier. Egypts top tier of listed firms tends to finance themselves mainly from operating cash flows, trade credits, and other short-term borrowing. This raises questions as to whether recent performance could have been even better had these firms done more in the way of long-term financing and long-term investment. This issue is even starker for a large second tier of much smaller firms. Regarding the stock market, the analysis finds that the Egyptian Exchange has experienced extraordinary market capitalization growth fueled by strong price increases. Market activity has been increasing as well, but reached expected levels only recently. Despite strong improvement, however, many companies remain illiquid. In its ability to raise capital, Egypt seems to do well, but privatizations and relatively low gross fixed capital formation might distort this picture.

The Impact of Funding Models and Foreign Bank Ownership on Bank Credit Growth: Is Central and Eastern Europe Different?

This paper provides new evidence on the factors affecting protracted credit contraction in the wake of the global financial crisis. The paper applies panel vector autoregressions to a global panel that consists of quarterly data for 41 countries for the period 2000-2011 and documents that domestic private credit growth is highly sensitive to cross-border funding shocks around the world. This relationship is significantly stronger in Central and Eastern Europe, a region with considerably stronger foreign presence, higher cross-border funding, and elevated loan-to-deposit ratios compared with the rest of the world. The paper shows that high foreign ownership per se does not appear to explain credit response differences to foreign funding shocks. Rather, there is a stronger response in countries that exhibit high loan-to-deposit ratios and a high reliance on foreign funding relative to local deposits. The results suggest that funding model differences were at the heart of the post-crisis credit contraction in several Central and Eastern European countries. These findings have important regulatory and supervisory implications for emerging countries in Central and Eastern Europe as well as for other countries.

Cross-border spillover effects of the g20 financial regulatory reforms : results from a pilot survey

In 2009, the G20 embarked on an ambitious financial regulatory reform agenda to address the fault lines that caused the global financial crisis. Although the global benefits are expected to outweigh the overall costs, these reforms could produce cross-border adverse spillover effects to individual emerging markets and developing economies that are not required to implement the reforms themselves, but are affected by their implementation elsewhere. To improve the evidence base on such potential adverse impacts, the World Bank has undertaken qualitative surveys of senior officials at regulatory agencies, local banks, and global banks that are active in seven emerging markets and developing economies. While important caveats prevent the formulation of definitive conclusions, the survey finds that banks and regulators routinely have different perspectives on the impacts. Most banks claim adverse effects on financial products, services, and markets; regulators broadly expect the effects to be positive over the longer term, but some recognize they may be negative during the transition phase. Regulators tend to agree that the (potential for) spillover impacts demand stronger home-host coordination, impose a higher supervisory burden, and require a stronger role for the international community to monitor and evaluate the impacts. The findings also emphasize the need for regulatory consistency within and between jurisdictions to ensure a level playing field. Taken together, more work remains to better understand the nature of these spillover effects, how they shape the provision of commercial financing to meet developmental objectives, and what action can be taken to mitigate any adverse impacts.

INVITED EDITORIAL: It’s a Small World: Boardroom Networks and Stock Performance

1. Erik Feyen 1. is technical advisor of Ahead Analytics Inc. and lead financial sector economist for the World Bank in Washington, DC . (efeijen{at}worldbank.org) Popular myth has it that all people are connected through at most six degrees of separation. This number is in fact