Presentation Transcript

1. Financial Development in LACThe Road Ahead

   2011 Regional Flagship Launch Central Bank of Brazil March 22, 2012 Chief Economist Office Latin America and the Caribbean The World Bank 0
2. Structure of the Report Prudential oversight Where is LAC? The new agenda Macro-prudential policy Micro-systemic regulation Systemic supervision Financial development Frictions, failures, paradigms Bright and dark sides Patterns and paths Where does LAC stand? Domestic FD Financial globalization Financial inclusion Developmental issues The banking gap The equity gap Going long Risk absorption by the state
3. Introduction Where does LAC stand with respect to financial development? Financial deepening, irrespective of financial stability How is financial development related to financial globalization? Use of international markets (offshorization) Basic trends here Latin America centered, with lessons and evidence on other EMs Given time constraints, some scattered evidence presented The report has many more details for the interested readers Policy discussion
4. Introduction Bird’s-eye view, showing stock-taking exercise Broad and systematic comparisons across selected countries and regions Mostly over the past two decades Several comparisons shed new light to different observers Problem of benchmarking Before/after analysis? Developed countries? Which ones? US? Germany? Others non-core? Which regions and countries among developing ones? Which controls?
5. Introduction Focus on domestic financial development Compare to globalization process Essential given large extent of globalization And nature of financial intermediation in integrated markets Focus on banks and capital markets (bond and equity markets) Main focus on firms, but shed light on borrowers and creditors Different indicators Standard (e.g., over GDP) and relative sizes of different markets With and without controls Indicators capturing the changing nature of financing Illustrate issues like currency and maturity composition, liquidity, concentration, firms’ access to finance
6. Summary of Findings Mixed, nuanced picture from all the data: no linear story Financial systems developed over the last two decades Also became significantly more complex From a mostly bank-based model to a more complete and interconnected model Non-bank markets (bonds and equities) increased in absolute and relative size New markets also developing Non-bank institutional investors now play more central role The number and sophistication of participants (including cross-border investors) increasing Banks connected to capital markets and institutional investors
7. Summary of Findings Nature of financing also changing, slowly In general, towards the better Increased maturity of bonds (both private and public sectors in domestic and foreign markets) Decline in the extent of dollarization of loans and bonds Even some issues of local currency bonds in foreign markets Local developments paired by two-way internationalization Big chunk of globalization/offshorization happened in the 1990s But now, safer integration EMs net creditors in debt and net debtors in equity Different stories for bond and equity markets Bonds domestically and equity abroad
8. Summary of Findings Despite all new developments, large heterogeneity across regions and countries No convergence yet – advanced economies developed even more Though different stories across regions, some general trends Many of the improvements centered in certain areas, and countries Many shortcomings in several important EMs Bank credit stagnated in various countries Firm financing from banks decreased in relative terms Bond markets expanded, but with limitations In banks and bonds, public sector still captures significant share Equity markets still small, illiquid, and concentrated in large firms Institutional investors sophisticated and large in several countries, but with much more limited role than previously thought
9. Implications of Findings Far away from model of dispersed ownership and participation Supply versus demand effects Constraints not on lack of available funds: domestic & foreign savers Many assets available for investment not purchased by institutional investors or foreigners, which hold large resources Institutional investors seem to shy away from risk Incentives to banks to move first into relatively easy markets (consumer, leasing, services), after big corporations left to capital markets Incentives to asset managers and the overall functioning of financial systems does not contribute to expectations
10. Implications of Findings Many firms not becoming public or not accessing markets Capital markets service only few firms, with increasing concentration domestically and abroad Substantial financing through retained earnings and banks Regulations do not seem to be the main obstacle Several challenges ahead Growing savings Role of financial intermediaries Need for more risk taking paired with stability Spillovers to all firms Need to catch up Complexities and interconnectedness
11. Structure of the Financial System
12. Relative Size: All Increased, But No Catch Up Size of Domestic Financial System Source: IFS, BIS, and WDI
13. Structure of Domestic Financial Systems LAC7 Source: Lane and Milesi-Ferretti (2007), IFS, BIS, WDI, EMBD, ICI, ASSAL, AIOS, and local sources
14. Banks
15. Banks: Uneven Evolution Private Bank Claims Numbers in parentheses next to region names represent the number of countries included in the graphs. Source: IMF’s IFS
16. Banks: Relative Decline in Corporate Lending Credit Composition Source: Local sources
17. Banks: Not Closing the Gap Private Credit over GDP (Residuals) Note: Controls used are GDP per capita, population size and density, young and old age dependency ratios, a financial offshore center dummy, a transition country dummy, and a large fuel exporter dummy.
18. Retail Stores: Hold Significant Fraction of Debt Consumer Debt in Chile Source: Matus et al. (2010)
19. Access:But ConsiderablyMore Expensive Median Checking and Savings Accounts Annual Fees (% of GDP per capita)
20. Bond Markets
21. Bond Markets Have Expanded, But Public Sector Still Large and Growing Composition of Bond Markets, % of GDP Source: BIS
22. Bond Market Turnover Not on the Rise Bond Value Trading as % of Total Bond Market Capitalization Note: Trading data includes domestic private, domestic public and foreign bonds traded in local stock exchanges. Source: World Federation of Exchanges (WFE)
23. Private Bond Issuance is Small … Amount of New Issues Source: SDC
24. … Except in Chile Total Amount of New Issues per Year as % of GDP Source: SDC
25. Private Bonds: Few (and Fewer) Firms Use Markets Average Number of Firms Issuing Bonds Source: SDC
26. Private Bonds: Few Issues Capture Significant Share Concentration in Private Bond Markets Amount Raised by Top 5 Issues Note: Concentration is defined as the top-5 issues as a percentage of the total amount raised by firms in domestic bond markets. Numbers in the base of the bars represent the average number of yearly issues. Source: SDC
27. Equity Markets
28. EquityMarket Capitalization Market Capitalization as % of GDP Source: SDC
29. Equity Trading: A Different Picture than Mkt. Cap. Trading Activity – Turnover Ratio Note: Turnover ratio is defined as the total value traded per year in domestic markets over total market capitalization. Source: SDC
30. Partly Explained by Trading Abroad Value Traded Abroad to Total Value Traded Source: Bank of New York and Bloomberg
31. Partly Explained by Migration Abroad Domestic and International Value Traded over Domestic Market Capitalization For Firms with DR Programs Source: Bloomberg
32. Domestic Firms Gaining Space in Brazil Domestic Value Traded in Securities of Domestic and International Firms Source: Bloomberg and EMDB
33. … And Trading is Becoming Less Concentrated Concentration in Domestic Equity Markets Share of Value Traded by Top 5 Companies Source: EMDB
34. Breadth of Equity Markets: Issuance Activity Small (and Declining) in LAC Equity Markets – Issuance Activity Source: SDC
35. Equity Markets: Few Firms List Number of Listed Firms Source: WDI
36. Equity Markets: Even Fewer Firms Raise Capital Average Number of Firms Raising Capital Source: SDC
37. Equity Markets: Also with SignificantConcentration Concentration in Domestic Equity Markets Share of Amount Raised by Top 5 Issues Note: Numbers in the base of the bars represent the average numbers of yearly issues. Source: SDC
38. Institutional Investors
39. Pension Funds Gaining Ground Pension Fund Assets Source: AIOS
40. Mutual Funds Growing Too Mutual Fund Assets Source: ICI
41. … However, Portfolios are Concentrated in Deposits and Public Bonds Composition of Pension Fund Investments in Latin America Source: OECD, ABRAPP, AIOSFP, FIAP, and local sources
42. … However, Portfolios are Concentrated in Deposits and Public Bonds Portfolio Holdings of Pension Funds: Source: OECD – Latest available information. Data for most countries are from 2009.
43. Mutual Fund Assets Also Concentrated in Bonds and MM Instruments Mutual Funds - Portfolio Holdings Brazil Source: IMF’s IFS, FGV-Rio, Conasev, Superfinanciera, Andimia, and Banxico
44. Mutual Fund Assets Also Concentrated in Bonds and MM Instruments Mutual Funds - Portfolio Holdings Chile Source: IMF’s IFS, FGV-Rio, Conasev, Superfinanciera, Andimia, and Banxico
45. Mutual Fund Assets Also Concentrated in Bonds and MM Instruments Mutual Funds - Portfolio Holdings Mexico Source: IMF’s IFS, FGV-Rio, Conasev, Superfinanciera, Andimia, and Banxico
46. Among Debt Securities: Pension and Mutual Funds Short Term vs. Insurance Cos. Maturity Structure of Chilean Domestic Mutual Funds and PFAs vs. Insurance Companies Share of portfolio Years to maturity Note: This figure compares the maturity structure of Chilean insurance companies to that of Chilean domestic mutual funds and PFAs. Only medium- and long-term bond mutual funds are taken into account. Source: Opazo, Raddatz, Schmukler (2011).
47. Even When Investing Long Term Pays Off Bond Sharpe Ratio at Different Maturities and Holding Periods Indices of Chilean Government Inflation-Indexed Bonds Indices Based on the Estimated Yield Curve 3m 12m 24m 36 m Note: This figure presents the Sharpe ratios (average returns/standard deviations) of Chilean bonds of different maturities for various holding periods (3 months, 1 year, 2 years, and 3 years). It shows statistics for indices of government inflation-indexed bonds, and using prices from model-based estimations of the yield curve. Source: Opazo, Raddatz, Schmukler (2011).
48. Conclusions
49. Concluding Remarks: Bottom Line Substantially different & better, even when “insurmountable” Deeper systems, in domestic and international fronts More saving and more resources available in the economy Less crowding out by governments, but governments still large According to some measures, consumers appear to be better served Financial system more complex, somewhat more diversified Not that much bank-based Bonds and equity play bigger role, corporate bonds emerging Institutional investors much more prominent Other types of financing taking off Nature of financing is also changing Longer maturities and less dollarization – less credit risk More local financing, though foreign markets important for some Fewer mismatches in domestic and external balance sheets
50. Concluding Remarks: Bottom Line But several countries still lagging behind in many respects Growing divergence and cross-regional heterogeneity No finance for all! Financial development through capital markets not spread to all firms Constraints not on the supply side of funds (based on broad data) Constraints likely not on specific regulatory issues These get much attention at country level, but this is a cross-country issue Financial intermediation process more difficult than thought First expands to areas relatively easy to finance Incentives might play crucial role for more risk taking Might not yield socially optimal outcome Financial intermediaries brain of the economy, with MS
51. Going Long and Riskier LAC’s current asset managers Charge substantial fees Yet spend mostly in marketing rather than asset management Large chunk of domestic savings intermediated by them Avoid risk taking, denying savers good long-term returns … … and corporations risk capital But at the same time shield them from volatility Herd to be close to the pack The pitfalls to avoid (U.S.) Excessive risk taking Liquidity fallacy
52. Going Long and Riskier Some of the policy challenges Step up the state’s oversight without undermining private monitoring Promote market discipline through standardization and benchmarking without boosting short-termism Take more long-term risk while being able to monitor managers Be contrarian and use potential long-term arbitrage opportunities without generating backlash due to negative outcomes Develop alternative ways of promoting participation (mandatory participation, shared infrastructure) Generate healthy competition among financial intermediaries without perverse incentives Take advantage of useful international diversification
53. Concluding Remarks: Bottom Line Not clear how to proceed in many areas Institutional investors are emblematic Similarly with banks and capital markets Nor what to expect of capital market financing Plus lack of obvious paradigm at international level Collapse of role models: no roadmap after the crisis E.g. what to make of securitization and mortgage financing? Eventually, need to catch up, grow, and take risk without undermining stability: strong trade-off Macro-prudential policies might not help Hard to distinguish spurious boom from leapfrog Especially for lagging areas and countries
54. Thank you!