As several of the Asian economies have recovered from the East Asian financial crisis, several le... more As several of the Asian economies have recovered from the East Asian financial crisis, several lessons have become clear. First, the proximate cause of the financial problems in many countries was a futile attempt to defend an overvalued currency. A second more fundamental cause was allowing a weak banking system to become overexposed to foreign exchange risk. However, the recovery of some but not all economies points to a deeper concern. The countries that had stronger financial institutions and undertook more rapid restructuring of their banking systems coped more successfully with the financial crisis. The clear lesson for China is the importance of strong financial institutions when opening up capital markets. With the accession of China to the WTO, the main question is whether this event can be the impetus to institution building in the banking sector. Currently China is one of the most monetised economies in the world. At the end of 1999, the loan to GDP ratio was 114 per cent. However, four large state-owned banks that have combined market shares in loans and deposits of over 70 per cent dominate the banking sector. Furthermore, interest rates are set centrally by the government and banks have little leeway in pricing risk. Although a program is in place to remove the stock of old bad debt from these four banks' balance sheets by transferring it to asset management companies, the likelihood of the state retaining ownership of these banks for the foreseeable future is high. The medium-term solution requires China to develop strong financial institutions that will not be unduly hurt by foreign competition and to develop an interbank market to facilitate the liberalisation of interest rates. The requirements for WTO entry are that foreign banks be allowed to conduct all types of foreign exchange transactions with foreign clients immediately on entry and with Chinese clients within one year of entry in designated cities. The Chinese government has
Modern banking institutions were virtually non-existent in the planned economies of central Europ... more Modern banking institutions were virtually non-existent in the planned economies of central Europe and the former Soviet Union. In the early transition period, banking sectors began to develop during several years of macroeconomic decline and turbulence accompanied by repeated bank crises. However, governments in many transition countries learned from these tumultuous experiences and eventually dealt successfully with the accumulated bad loans and lack of strong bank regulation. In addition, rapid progress in bank privatization and consolidation took place in the late 1990s and early 2000s, usually with the participation of foreign banks. By the mid 2000s the banking sectors in many transition countries were dominated by foreign owners and were able to provide a wide range of services. Credit growth resumed, sometimes too rapidly, particularly in the form of lending to households. The global financial crisis put transition banking to test. Countries that had expanded credit rapidly were vulnerable to the macroeconomic shock and there was considerable concern that foreign owners would reduce their funding to transition country subsidiaries. However, the banking sectors turned out to be resilient, a strong indication of the rapid progress in institutional development and regulatory capabilities in the transition countries.
Our objective is to examine empirically the behavior of foreign banks regarding real loan growth ... more Our objective is to examine empirically the behavior of foreign banks regarding real loan growth during a financial crisis for a set of countries in which these banks dominate the banking sectors due primarily to having taken over large existing former state-owned banks. The eight countries are among the most developed in Emerging Europe, their banking sectors having been modernized by the beginning of the time period. We consider a data period that includes an initial credit boom (2004 -2007) followed by the global financial crisis (2008 & 2009) and the onset of the Eurozone crisis (2010). Our main innovations with respect to the existing literature on banking during the financial crisis are to include explicit consideration of exchange rate dynamics and to separate foreign banks into two categories, namely, subsidiaries of the Big 6 European MNBs and all other foreign-controlled banks. Our results show that bank lending was impacted adversely by the crisis but that the two types of foreign banks behaved differently. The Big 6 banks remained committed to the region in that their lending behavior was not different from that of domestic banks corroborating the notion that these countries are a "second home market" for these banks. Contrariwise, the other foreign banks were primarily responsible for fueling the credit boom prior to the crisis but then "cut and ran" by decreasing their lending appreciably during the crisis. Our results also indicate different bank behavior in countries with flexible exchange rate regimes from those in the Eurozone. Hence, we conclude that both innovations matter in empirical work on bank behavior during a crisis in the region and may, by extension, be relevant to other small countries in which banking sectors are dominated by foreign financial institutions.
Banking in transition countries 4 All opinions expressed are those of the authors and do not nece... more Banking in transition countries 4 All opinions expressed are those of the authors and do not necessarily reflect the views of the Bank of Finland.
I. INTRODUCTION: THE SPECIAL CHARACTERISTICS OF TRANSITION Broadly speaking, the role of the fina... more I. INTRODUCTION: THE SPECIAL CHARACTERISTICS OF TRANSITION Broadly speaking, the role of the financial sector in all economies is to channel resources from primary savers to investment projects. The importance of this financial sector role has received much attention in the recent literature on economic growth. A strong consensus has emerged in the last decade that well-functioning financial intermediaries have a significant impact on economic growth. 1 Modern economies have a wide range of market-oriented institutions for facilitating this process. In planned economies, this process was conducted by administrative arrangements and there were few market-oriented elements of the financial sector. The only ubiquitous financial institutions in the pretransition planned economies were banks, which acted as recordkeepers for the planning process and payment agents among state entities rather than as financial intermediaries. Although these banks had the appearances of real banks, they did not function as banks would in a market-oriented economy. Thus, the first step in the transition process for the financial sector is the development of market-oriented financial sector institutions. Given the unique problem faced by the financial sectors in formerly planned economies, many observers expected that the transition process would extend over many years. In fact, many transition economies have made remarkable process in the first decade of transition. Although financial sectors are far from perfect, the elements of market-oriented intermediation are already the rule rather than the exception throughout the transition world. Although banks are the most visible and often the dominant financial sector institutions, they are only one part of the process of financial intermediation. Financing arrangements that allocate resources in a market economy fall along a broad and long continuum. Financing starts with the entrepreneur, who collects the savings of friends and family, and extends to the large firm that raises capital in a variety of ways, ranging from the issuance of publicly traded 1 For a critical survey and evaluation of the literature on finance and growth, see Wachtel, 2001.
In this paper, we present indirect evidence that the IMF's insistence on foreign control of two l... more In this paper, we present indirect evidence that the IMF's insistence on foreign control of two large nationwide Korean banks in exchange for short-term support during the 1997 financial crisis helped restrain soft related lending practices. News signaling the likely sale of a bank to a foreign financial institution yields an average daily decrease of about 2% in the stock price of related borrowers. News indicating difficulty in finding an interested foreign investor generates an increase in the stock price of related borrowers of about the same magnitude. These signals have larger impacts on less-profitable, lessliquid, and more bank-dependent firms.
Banking in transition countries 4 All opinions expressed are those of the authors and do not nece... more Banking in transition countries 4 All opinions expressed are those of the authors and do not necessarily reflect the views of the Bank of Finland.
* I am extremely grateful to the National Council for Soviet and East European Research for finan... more * I am extremely grateful to the National Council for Soviet and East European Research for financial support of this research (Contract #807-07) and to the people in Hungary and Poland who educated me about these issues. I wish to thank especially Istvan Abel, Ryszard Kokoszcznski, ...
In a static environment, J. Hirschleifer's marginal cost solution to the transfer pricing problem... more In a static environment, J. Hirschleifer's marginal cost solution to the transfer pricing problem is commonly accepted as analytically correct. However, actual pricing practice within Western corporations and socialist-planned economies generally deviates from marginal cost pricing. Some form of average cost pricing is more commonly chosen. Recently in this journal, H. Enzer has claimed to show that some form of average cost pricing is indeed the analytically correct solution to the transfer pricing problem when choice of technique and manipulation are allowed. Enzer claims that optimal decisions made by each of two divisions according to their individual self-interests are made compatible with overall firm optimization when the transfer price assigned to the internally-transferred commodity is any form of average cost. We show that the marginal cost solution is correct for Enzer's problem in the absence of manipulation by either division. indeed, this was all that Hirschleifer claimed. in the process. we uncover a fundamental mathematical error in Enzer's argument. When manipulation of the transfer price by divisions is allowed, we demonstrate the faults with Enzer's average cost solution and conclude Hirschleifer's original statements on manipulation to be correct even in Enzer's environment. A final section briefly indicates the importance to the transfer pricing problem of a growing body of economic literature on incentive structures. 'Cf. Haynes and Henry IS], pp. 413-424, and McGuigan and Moyer (141, pp. 349-360. Gupta and Cozzolino *Refer to Enzer I41, p. 379, first-order conditions number one for division one and number two for division two. Notice that r , is not considered parametric in either. ?See Hirschleifer (91, p. 310. for a discussion of manipulation.
... Despite remarks to the contrary (see p. 227), Fan does not allow the infamous ratcheteffect t... more ... Despite remarks to the contrary (see p. 227), Fan does not allow the infamous ratcheteffect to influence norm reporting or actual performance. To introduce the ratchet effect requires explicit consideration of the inter-action between ...
Abstract In this paper we establish the robustness of the comparative static results under manage... more Abstract In this paper we establish the robustness of the comparative static results under managerial risk aversion and discretionary behavior for the Bonin- and Weitzman-type Soviet incentive schemes. Specifically, we show that the self-imposed target (forecasted performance) responds appropriately to changes in the penalty piecerates and that the share parameter can be used to encourage a higher norm and an accompanying higher level of managerial effort. Our results correct an error in the literature on the Bonin-type scheme and impose weaker conditions than previous work on the Weitzman-type scheme.
... be larger than the previous full-employment level (Q*). Although initial membership is an imp... more ... be larger than the previous full-employment level (Q*). Although initial membership is an important element of the short-run supply curve for our egalitarian cooperative, we find none of the abnormalities present in Brewer-Browning because we assume that the debt obligation is ...
Abstract The collective farm household's optimal allocation of time among work on both the co... more Abstract The collective farm household's optimal allocation of time among work on both the collective and private plots and leisure is analyzed in certain and uncertain environments. The examination of static equilibrium solutions indicates that the collective farm need not be inefficient nor provide poor work incentives. Uncertainty is shown to exert a distinctive influence on work allocations. Implications are drawn from comparative static analysis to discuss the effects of government policy, e.g., increased crop quotas, on work incentives. The Soviet development period, recent agricultural reforms in the Khrushchev-Brezhnev era, and general policy implications are considered in the light of these new analytical results.
We examine the efforts of transition economies to deal with financial fragility and resolve banki... more We examine the efforts of transition economies to deal with financial fragility and resolve banking cries We characterize the birthing process of banking in transition and the three essential features of banking crises in transition economies: (i) bad loans and the relationship to state owned industries, (ii) development of institutional infrastructure and (iii) credible commitments to resolution and privatization. We then discuss the experiences of seven important transition countries in order to identify the salient features of their efforts to resolve banking crises.
All opinions expressed are those of the authors and do not necessarily reflect the views of the B... more All opinions expressed are those of the authors and do not necessarily reflect the views of the Bank of Finland.
As several of the Asian economies have recovered from the East Asian financial crisis, several le... more As several of the Asian economies have recovered from the East Asian financial crisis, several lessons have become clear. First, the proximate cause of the financial problems in many countries was a futile attempt to defend an overvalued currency. A second more fundamental cause was allowing a weak banking system to become overexposed to foreign exchange risk. However, the recovery of some but not all economies points to a deeper concern. The countries that had stronger financial institutions and undertook more rapid restructuring of their banking systems coped more successfully with the financial crisis. The clear lesson for China is the importance of strong financial institutions when opening up capital markets. With the accession of China to the WTO, the main question is whether this event can be the impetus to institution building in the banking sector. Currently China is one of the most monetised economies in the world. At the end of 1999, the loan to GDP ratio was 114 per cent. However, four large state-owned banks that have combined market shares in loans and deposits of over 70 per cent dominate the banking sector. Furthermore, interest rates are set centrally by the government and banks have little leeway in pricing risk. Although a program is in place to remove the stock of old bad debt from these four banks' balance sheets by transferring it to asset management companies, the likelihood of the state retaining ownership of these banks for the foreseeable future is high. The medium-term solution requires China to develop strong financial institutions that will not be unduly hurt by foreign competition and to develop an interbank market to facilitate the liberalisation of interest rates. The requirements for WTO entry are that foreign banks be allowed to conduct all types of foreign exchange transactions with foreign clients immediately on entry and with Chinese clients within one year of entry in designated cities. The Chinese government has
Modern banking institutions were virtually non-existent in the planned economies of central Europ... more Modern banking institutions were virtually non-existent in the planned economies of central Europe and the former Soviet Union. In the early transition period, banking sectors began to develop during several years of macroeconomic decline and turbulence accompanied by repeated bank crises. However, governments in many transition countries learned from these tumultuous experiences and eventually dealt successfully with the accumulated bad loans and lack of strong bank regulation. In addition, rapid progress in bank privatization and consolidation took place in the late 1990s and early 2000s, usually with the participation of foreign banks. By the mid 2000s the banking sectors in many transition countries were dominated by foreign owners and were able to provide a wide range of services. Credit growth resumed, sometimes too rapidly, particularly in the form of lending to households. The global financial crisis put transition banking to test. Countries that had expanded credit rapidly were vulnerable to the macroeconomic shock and there was considerable concern that foreign owners would reduce their funding to transition country subsidiaries. However, the banking sectors turned out to be resilient, a strong indication of the rapid progress in institutional development and regulatory capabilities in the transition countries.
Our objective is to examine empirically the behavior of foreign banks regarding real loan growth ... more Our objective is to examine empirically the behavior of foreign banks regarding real loan growth during a financial crisis for a set of countries in which these banks dominate the banking sectors due primarily to having taken over large existing former state-owned banks. The eight countries are among the most developed in Emerging Europe, their banking sectors having been modernized by the beginning of the time period. We consider a data period that includes an initial credit boom (2004 -2007) followed by the global financial crisis (2008 & 2009) and the onset of the Eurozone crisis (2010). Our main innovations with respect to the existing literature on banking during the financial crisis are to include explicit consideration of exchange rate dynamics and to separate foreign banks into two categories, namely, subsidiaries of the Big 6 European MNBs and all other foreign-controlled banks. Our results show that bank lending was impacted adversely by the crisis but that the two types of foreign banks behaved differently. The Big 6 banks remained committed to the region in that their lending behavior was not different from that of domestic banks corroborating the notion that these countries are a "second home market" for these banks. Contrariwise, the other foreign banks were primarily responsible for fueling the credit boom prior to the crisis but then "cut and ran" by decreasing their lending appreciably during the crisis. Our results also indicate different bank behavior in countries with flexible exchange rate regimes from those in the Eurozone. Hence, we conclude that both innovations matter in empirical work on bank behavior during a crisis in the region and may, by extension, be relevant to other small countries in which banking sectors are dominated by foreign financial institutions.
Banking in transition countries 4 All opinions expressed are those of the authors and do not nece... more Banking in transition countries 4 All opinions expressed are those of the authors and do not necessarily reflect the views of the Bank of Finland.
I. INTRODUCTION: THE SPECIAL CHARACTERISTICS OF TRANSITION Broadly speaking, the role of the fina... more I. INTRODUCTION: THE SPECIAL CHARACTERISTICS OF TRANSITION Broadly speaking, the role of the financial sector in all economies is to channel resources from primary savers to investment projects. The importance of this financial sector role has received much attention in the recent literature on economic growth. A strong consensus has emerged in the last decade that well-functioning financial intermediaries have a significant impact on economic growth. 1 Modern economies have a wide range of market-oriented institutions for facilitating this process. In planned economies, this process was conducted by administrative arrangements and there were few market-oriented elements of the financial sector. The only ubiquitous financial institutions in the pretransition planned economies were banks, which acted as recordkeepers for the planning process and payment agents among state entities rather than as financial intermediaries. Although these banks had the appearances of real banks, they did not function as banks would in a market-oriented economy. Thus, the first step in the transition process for the financial sector is the development of market-oriented financial sector institutions. Given the unique problem faced by the financial sectors in formerly planned economies, many observers expected that the transition process would extend over many years. In fact, many transition economies have made remarkable process in the first decade of transition. Although financial sectors are far from perfect, the elements of market-oriented intermediation are already the rule rather than the exception throughout the transition world. Although banks are the most visible and often the dominant financial sector institutions, they are only one part of the process of financial intermediation. Financing arrangements that allocate resources in a market economy fall along a broad and long continuum. Financing starts with the entrepreneur, who collects the savings of friends and family, and extends to the large firm that raises capital in a variety of ways, ranging from the issuance of publicly traded 1 For a critical survey and evaluation of the literature on finance and growth, see Wachtel, 2001.
In this paper, we present indirect evidence that the IMF's insistence on foreign control of two l... more In this paper, we present indirect evidence that the IMF's insistence on foreign control of two large nationwide Korean banks in exchange for short-term support during the 1997 financial crisis helped restrain soft related lending practices. News signaling the likely sale of a bank to a foreign financial institution yields an average daily decrease of about 2% in the stock price of related borrowers. News indicating difficulty in finding an interested foreign investor generates an increase in the stock price of related borrowers of about the same magnitude. These signals have larger impacts on less-profitable, lessliquid, and more bank-dependent firms.
Banking in transition countries 4 All opinions expressed are those of the authors and do not nece... more Banking in transition countries 4 All opinions expressed are those of the authors and do not necessarily reflect the views of the Bank of Finland.
* I am extremely grateful to the National Council for Soviet and East European Research for finan... more * I am extremely grateful to the National Council for Soviet and East European Research for financial support of this research (Contract #807-07) and to the people in Hungary and Poland who educated me about these issues. I wish to thank especially Istvan Abel, Ryszard Kokoszcznski, ...
In a static environment, J. Hirschleifer's marginal cost solution to the transfer pricing problem... more In a static environment, J. Hirschleifer's marginal cost solution to the transfer pricing problem is commonly accepted as analytically correct. However, actual pricing practice within Western corporations and socialist-planned economies generally deviates from marginal cost pricing. Some form of average cost pricing is more commonly chosen. Recently in this journal, H. Enzer has claimed to show that some form of average cost pricing is indeed the analytically correct solution to the transfer pricing problem when choice of technique and manipulation are allowed. Enzer claims that optimal decisions made by each of two divisions according to their individual self-interests are made compatible with overall firm optimization when the transfer price assigned to the internally-transferred commodity is any form of average cost. We show that the marginal cost solution is correct for Enzer's problem in the absence of manipulation by either division. indeed, this was all that Hirschleifer claimed. in the process. we uncover a fundamental mathematical error in Enzer's argument. When manipulation of the transfer price by divisions is allowed, we demonstrate the faults with Enzer's average cost solution and conclude Hirschleifer's original statements on manipulation to be correct even in Enzer's environment. A final section briefly indicates the importance to the transfer pricing problem of a growing body of economic literature on incentive structures. 'Cf. Haynes and Henry IS], pp. 413-424, and McGuigan and Moyer (141, pp. 349-360. Gupta and Cozzolino *Refer to Enzer I41, p. 379, first-order conditions number one for division one and number two for division two. Notice that r , is not considered parametric in either. ?See Hirschleifer (91, p. 310. for a discussion of manipulation.
... Despite remarks to the contrary (see p. 227), Fan does not allow the infamous ratcheteffect t... more ... Despite remarks to the contrary (see p. 227), Fan does not allow the infamous ratcheteffect to influence norm reporting or actual performance. To introduce the ratchet effect requires explicit consideration of the inter-action between ...
Abstract In this paper we establish the robustness of the comparative static results under manage... more Abstract In this paper we establish the robustness of the comparative static results under managerial risk aversion and discretionary behavior for the Bonin- and Weitzman-type Soviet incentive schemes. Specifically, we show that the self-imposed target (forecasted performance) responds appropriately to changes in the penalty piecerates and that the share parameter can be used to encourage a higher norm and an accompanying higher level of managerial effort. Our results correct an error in the literature on the Bonin-type scheme and impose weaker conditions than previous work on the Weitzman-type scheme.
... be larger than the previous full-employment level (Q*). Although initial membership is an imp... more ... be larger than the previous full-employment level (Q*). Although initial membership is an important element of the short-run supply curve for our egalitarian cooperative, we find none of the abnormalities present in Brewer-Browning because we assume that the debt obligation is ...
Abstract The collective farm household's optimal allocation of time among work on both the co... more Abstract The collective farm household's optimal allocation of time among work on both the collective and private plots and leisure is analyzed in certain and uncertain environments. The examination of static equilibrium solutions indicates that the collective farm need not be inefficient nor provide poor work incentives. Uncertainty is shown to exert a distinctive influence on work allocations. Implications are drawn from comparative static analysis to discuss the effects of government policy, e.g., increased crop quotas, on work incentives. The Soviet development period, recent agricultural reforms in the Khrushchev-Brezhnev era, and general policy implications are considered in the light of these new analytical results.
We examine the efforts of transition economies to deal with financial fragility and resolve banki... more We examine the efforts of transition economies to deal with financial fragility and resolve banking cries We characterize the birthing process of banking in transition and the three essential features of banking crises in transition economies: (i) bad loans and the relationship to state owned industries, (ii) development of institutional infrastructure and (iii) credible commitments to resolution and privatization. We then discuss the experiences of seven important transition countries in order to identify the salient features of their efforts to resolve banking crises.
All opinions expressed are those of the authors and do not necessarily reflect the views of the B... more All opinions expressed are those of the authors and do not necessarily reflect the views of the Bank of Finland.
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Papers by John Bonin