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Institutional Savings and Financial Markets

Institutional Savings and Financial Markets. Alberto R. Musalem, and Thierry Tressel. Definition and Importance of Contractual Savings. Funded benefit plans: Retirement savings and Annuities Life insurance

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Institutional Savings and Financial Markets

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  1. Institutional Savings and Financial Markets Alberto R. Musalem, and Thierry Tressel

  2. Definition and Importance of Contractual Savings • Funded benefit plans: • Retirement savings and Annuities • Life insurance • Funded unemployment benefits, gratuity, end of service indemnity, severance payments • Funded contingencies: down payment for a house, education, weddings, funerals • Importance: supply long term savings

  3. Financial assets of contractual savings, (% of GDP)

  4. Shares of contractual savings and M2 in financial assets (%, 2000)

  5. Economic Impact of Contractual Savings • Potential positive effects on national saving • Requires fiscal adjustment to finance transitional costs of pension reforms that increase funding • More likely with mandatory funded systems due to credit constraints faced by low wage earners • Allocation effects due to higher share of long term funds • Securities market development • Improvement in banks and firms financial risks management • Growth effects • Due to allocation and potential national saving effects

  6. Impact of Contractual Savings Institutions on Securities Market (I) • An increase in CS relative to domestic financial assets promotes depth of stock and bond markets (MK/GDP) • The impact on stock market depth and liquidity (VT/GDP) is stronger in countries with more transparent corporate information • The impact on the stock markets is stronger in countries where: • The financial system is more market based • Contributions to pension funds are mandatory • Portfolio transactions in the capital account of the balance of payments are lower

  7. Impact of Contractual Savings Institutions on Securities Market (II) • The impact on the bond market is stronger in countries with a bank based financial system • The impact of contractual savings institutions on securities market is not the consequence of a joint determination of both contractual savings institutions and financial markets by other slow-moving characteristics of economies (level of development, education, demographic structures, legal environment) • Accordingly, policies shaping the institutionalization of savings do matter

  8. Social and Financial Risk Mitigation Effects • Beneficiaries improve management of longevity, death and other risks • Reduce debtors refinancing risks, including governments, by lengthening the maturity of debts • Reduce pressure on banks to engage in excessive term transformation risks • Reduce enterprise vulnerability to interest rate and demand shocks due to improved financial structure (higher equity/debt ratio) • Reduce governments contingent liabilities

  9. Banks’ Short Term to Total Loans vs Contractual Savings: Conditional CorrelationRegression Line: STL = -6.03 (4.58) * Log(Csfa,%GDP)+37.5 ( R2=0.18)

  10. Banks’ Net Interest Margin (NIM) and Contractual Savings: Conditional CorrelationRegression Line: NIM = -0.60 (-10.78) * Log(Csfa,%GDP)+1.47 (R2=0.35)

  11. Banks’ Credit Risk (Loan Loss Provisions to Total Assets) and Contractual Savings: Conditional CorrelationRegression Line: LLTA = -2.8E-3 (-3.23) * Csfa,%GDP + 0.6 ( R2 = 0.043)

  12. Firms’ Leverage (TDTE) vs Contractual Savings: Conditional Correlation - Market-based Financial Structure Residual = -1.16 * (CS Fin. Assets, % Sec. Market) (t-stat = -2.47) Pooled reg., 82 obs.

  13. Firms’ Leverage (TDTE) vs Contractual Savings: Conditional Correlation - Bank-based Financial StructureResidual = 4.0 * (CS Fin. Assets, % Sec. Market) (t-stat = 2.37) Pooled regression, 74 obs.

  14. Firms’ Debt Maturity vs Contractual Savings: Conditional Correlation - Market-based Financial StructureResidual = -0.09 * (CS Fin. Assets, % Sec Mkt) (t-stat = -3.84) Pooled regression, 82 obs.

  15. Firms’ Debt Maturity vs Contractual Savings: Conditional Correlation - Bank-based Financial StructureResidual = 0.28 * (CS Fin. Assets, % Sec Mkt) (t-stat = 5.28) Pooled Regression, 74 obs.

  16. Recommendations • Sustainable long term macroeconomic policy framework with low and relatively constant inflation • Well regulated and solvent financial intermediaries • Firms operating under principles of best practice on governance, accounting and disclosure of information • Government commitment to macroeconomic and financial sector reform • Best results on securities markets and firms finance when contractual savings institutions investments are conducted under prudent person rules • Although largest impact on securities markets with investment regime restricting investments abroad, it may induce mispricing of domestic assets

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