Financial Development in LAC The Road Ahead

Transcription

1 Financial Development in LAC The Road Ahead 211 Regional Flagship Asunción, Paraguay 24 May 212 Chief Economist Office Latin America and the Caribbean The World Bank 1

2 This study a holistic, systemic perspective LAC has gone through major historical swings in its financial development experience and policy State dirigisme => financial liberalization => crises management => emphasis on macro-financial stability => pursuit of financial inclusion LAC s Achilles Heel is healing Financial crises have been a LAC trademark But LAC has seen remarkable macro & prudential policy improvements LAC s financial systems weathered the global financial crisis remarkably well Financial maladies today are a problem of the center, not the periphery Need to assess where LAC stands now and the challenges ahead Can more be done to promote financial development without jeopardizing the financial stability gains? Even on stability, the global financial crisis has re-shuffled the cards 2

3 LAC s Progress in Financial Development 3

4 Financial systems have deepened in line with a transition from a bank-based model to a more diversified model 35 Size of Financial Systems - % of GDP Bancos Bonos Renta Variable % % del PIB % 66% 77% 36% 36% 56% 13% 8% 128% 83% 84% 95% 31% 13% 17% 43% 51% 5 69% 14% 92% 97% 123% 62% 42% 32% 35% 28% % 36% 6 39% 44% 85% 54% 59% 52% 8 15% 3% 4% 26% 24% Asia (5) China Europa de; Este (2) G7 (5) India ALC7 (6) Otras Economías Avanzadas (4) Paraguay Source: Didier and Schmukler (211) 4

5 Institutional investors LAC leads EMs in pension funds, keeps up in mutual funds, and trails a bit in insurance 4 Pension Funds 4 Mutual Funds 37% 35% 34% 33% 35% 34% % % 25% % % of GDP 2 15% 1 5% 16% 15% 2% 5% Asia (4) China Eastern Europe (7) 5% 6% 15% 19% G7 (7) India LAC7 (7) Oth. Adv. Economies (6) % of GDP 2 15% 1 5% 12% 17% 2% 8% 2% 4% Asia (4) China Eastern Europe (7) 4% 7% 7% 1 19% G7 (7) India LAC7 (7) Oth. Adv. Economies (6) 6 Insurance Companies 53% 5 46% % 35% % of GDP % 14% 12% 15% 1 7% 9% 4% 6% 5% 6% Asia (5) China Eastern Europe (6) G7 (7) India LAC7 (7) Oth. Adv. Economies (5) 5

6 The range of financial products is wider 9% Alternative Markets and Products: Annual Gross Issuance of Securitized Assets 5. Total Volume as % of GDP in Factoring Markets 4.7% 8% 7% % 4.5% % 4.3% 4. % of Total Deposits 6% 5% 4% 3% 3% 3% 6% 5% 4% % of Total Deposits 3.5% % % 1.6% 3.1% 3.3% 2.5% 2.6% 2% 1% 1% 1% 1..5%.6%.5%.7%.4%.4% Asia (1) Eastern Europe (1) G7 (7) LAC7 (3) Oth. Adv. Economies (2). Asia (3) China Eastern Europe (7) G7 (7) India LAC7 (6) Oth. Adv. Economies (7) Household Debt Banks Retailers Insurance Company Loans Family Comp. Funds and Cooperatives Car Financing University Loans Consumer Debt Banks Retailers Family Comp. Funds and Cooperatives Others 6.8% 3% 3% 15% Credit by Retailers in Chile 7.8% 15% 11.1% 53% 68.2% 17% 6

7 Financial globalization has become safer, Asia-like Net Creditor 1 5% LAC 7 Net Creditor 2 1 Asia (without China) Net Debtor -5% -1-15% -2-25% Net Debtor % Net Equity Position Net Debt Position Net Debt Position (Ex for. Reserves) Net Equity Position Net Debt Position Net Debt Position (Ex for. Reserves) 7

8 Governments have intensified their commitment to financial inclusion Governments' Commitment to Financial Inclusion : De Jure % 14% Asia (5) China Eastern Europe (7) 14% 1 86% 43% 29% 29% 14% 43% G7 (7) India LAC7 (7) Oth. Adv. Economies (7) % of Countries with Strategy Document % of Countries with a Mandate to Promote Savings % of Countries with a Mandate to Promote SME Access % of Countries with a Mandate to Promote Rural Access Governments' Commitment to Financial Inclusion : De Facto % 14% 29% 14% 29% 57% 1 Asia (5) China Eastern Europe (7) 29% 57% 71% 14% 57% G7 (7) India LAC7 (7) Oth. Adv. Economies (7) % of Countries with a Dedicated Unit to Promote Savings % of Countries with a Dedicated Unit to Promote SME Access % of Countries with a Dedicated Unit to Promote Rural Access % of Countries Offering Low Fee Accounts % of Countries Encouraging Use of Accounts for Gov. Transfers 8

9 and inclusion has broadened significantly in payments, savings, and micro-finance services 14 Median Number of Bank Branches and ATMs per 1, Adults 12 Median Branches per 1, Adults Median ATMs per 1, Adults ,5 2, Median Number of Bank Deposit Accounts and Loan Accounts per 1, Adults Median Deposit Accounts per 1, Adults 2,22 Asia Central America (+DR) Eastern Europe G7 India LAC7 Oth. Adv. Economies South America 1,5 Median Loans per 1, Adults 1,7 1, Asia Central America (+DR) Eastern Europe G7 India LAC7 Oth. Adv. Economies South America 9

10 Much progress in prudential oversight, especially in the larger LAC countries Financial Regulation and Supervision Progress in 9 LAC Countries bcp25 bcp5 bcp1.6 bcp18 bcp2 bcp6 bcp21 bcp17 bcp11 bcp1.5 bcp23 bcp3 bcp1.3 bcp1.1 bcp22 bcp9 bcp4 bcp1.2 bcp12 bcp1.4 bcp13 bcp1 bcp24 bcp19 bcp8 bcp2 bcprsm Before FSAP (2-25) Current FSAP: Progress (25-21) 1

11 LAC has stronger prudential buffers than most other regions in the world -6 Bank Capital/Assets 4 Regulatory Capital Bank Capital / Assets (Filtered) Regulatory Capital / RWA (Filtered) Log of GDP pc Log of GDP pc Asia Eastern Europe G7 Asia Eastern Europe G7 LAC7 Oth. Adv. Economies Spline Fit LAC7 Oth. Adv. Economies Spline Fit Liquid Assets/Total Assets Bank's ROA Liquid Assets / Total Assets (Filtered) Bank ROAA (Filtered) Log of GDP pc Log of GDP pc Asia Eastern Europe G7 LAC7 Oth. Adv. Economies Spline Fit Asia Eastern Europe G7 LAC7 Oth. Adv. Economies Spline Fit 11

12 Yet progress has been quite heterogeneous within LAC Bank credit to the private sector Outstanding Domestic Private Debt Securities as % of GDP Argentina Brasil Chile Colombia México Perú Uruguay Paraguay Argentina Brazil Chile Colombia Mexico Peru Uruguay Pension Fund Assets as % of GDP Stock Market Capitalization as % of GDP Argentina Brazil Chile Colombia Mexico Peru Uruguay Argentina Brazil Chile Colombia Mexico Peru Uruguay 12

13 LAC s Gaps in Financial Development 13

14 The bank credit depth gap has been actually growing Private Credit / GDP (Residuals) Asia Eastern Europe G7 LAC7 Oth. Adv. Economies 14

15 While banking intermediation margins have been converging, banking fees remain very high Median Checking and Savings Accounts Annual Fees Median Loan Fees 1.6% 1.4% 2.5% Mortgage Loan Fee % of GDP per capita 1.4% 1.2% 1..8%.6%.4%.2%.7%.3% Annual Fees Checking Account Annual Fees Savings Account.2%.2%.2%.5%.1% % of GDP per capita % 1..5% % 1.2%.7% Consumer Loan Fee SME Loan Fee Business Loan Fee 1.4% 1..7% 1.2%.9%.8% 1.4% 1.8% 1.1% 1.3%.6%.5% 1.2% 2... Asia (4) China Eastern Europe (6).... G7 (5) India LAC7 (7) Oth. Adv. Economies (4).. Asia (4) China Eastern Europe (6) G7 (5) India LAC7 (7) Oth. Adv. Economies (4) 8 Net Interest Margin Net Interest Magin (Residuals) Asia Eastern Europe G7 LAC7 Oth. Adv. Economies 15

16 Credit has been strongly biased towards consumption, at the expense of production and housing (long-term) Composition of Private Bank Credit % of Total Credit % 19% 17% 17% 18% 18% 11% 1 1 9% 9% 8% 14% 24% 26% 19% 34% 43% 14% 43% 43% 47% 47% 42% 14% 4 37% 51% 49% 58% % 25% 49% 41% 34% 45% 42% 43% 66% 62% 6 48% 48% China Eastern Europe (2) G7 (2) LAC7 (6) Oth. Adv. Economies (3) Commercial Mortgage 16

17 Non-bank credit (cooperatives) do not compensate for the deficit in bank credit (except in Paraguay?) 1.4% Cooperativas Financieras y de Crédito 1.2% 1.2% 1. % del PIB.8%.6%.8%.5%.6%.4%.4%.2%.2%. 3 1, Argentina Brazil Chile Colombia Mexico Peru Fuente: Bancos centrales locales

18 Credit by department stores, if anything, exacerbates the consumer-credit bias Deuda para consumo en Chile Bancos Tiendas Minoristas Cajas de Compensación y Ahorro Familiar Otros 15% 15% 53% 17% Fuente: Matus et al. (21)

19 Banking gap by credit type Brecha crediticia en ALC7 por tipo de crédito Esperado Real Brecha Brecha/Esperado Año 1996 Crédito al sector privado como % del PIB Comercial Hipotecas Consumo Total Año 27 Crédito al sector privado como % del PIB Comercial Hipotecas Consumo Total Nota: Los controles usados son PIB per cápita, densidad y tamaño de la población, ratio de dependencia de jóvenes y ancianos, y variables dicotómicas de centro offshore, país de transición y gran exportador de petróleo. Fuente: de la Torre, Feyen y Ize (211)

20 LAC firms do use banking services, including credit Uso de productos crediticios por parte de las firmas % nro. firmas PyMEs Grandes Empresas % 89% 87% % 68% 71% 65% 79% 73% 5 48% América Central (+RD) ALC7 América del Sur Asia Europa del Este Paraguay Fuente: Martínez Pería (211)

21 but bank credit is not a significant source of their funding Porcentaje de capital de trabajo financiado por bancos PyMEs Grandes Firmas 35% 3 29% 25% 25% 2 19% 19% 2 15% 15% 12% 16% 15% 14% 1 9% 8% 5% América Central (+RD) ALC7 América del Sur Asia Europa del Este Paraguay Fuente: Martínez Pería (211)

22 and the perceptions that SMEs have of access to bank credit are vastly different than those of large firms Porcentaje de Firmas que Consideran el Acceso al Crédito un Obstáculo Grave Firmas Grandes PyMES 3 28% 27% 28% 25% 23% 22% 21% % 13% 16% 14% 15% 1 1 5% Asia América Central (+RD) (6) Europa del Este (7) ALC7 (7) América del Sur (4) Paraguay Fuente: Martínez Pería (211)

23 The gap in domestic stock market liquidity has been growing and de-listing continues Stock Market Turnover (Residuals) Stock Market Turnover Relative to Global Benchmarks Asia Eastern Europe G7 LAC7 Oth. Adv. Economies Stock Market Turnover (Filtered) Stock Market Turnover Relative to Global Benchmarks Log of GDP pc Asia Eastern Europe G7 LAC7 Other Advanced Economies Spline Fit 6, Total Number of Listed Firms in Domestic Equity Markets 5,27 5, 4,441 Number of Firms 4, 3, 2, ,72 2,322 1,382 1, Asia (5) China Eastern Europe (7) G7 (7) India LAC7 (7) Oth. Adv. Economies (7) Source: de la Torre, Feyen, and Ize (211). 23

24 Capital markets are for very few, large companies 6 Total Number of Firms Issuing Equity per Year Number of Firms Asia (5) China Eastern Europe (7) G7 (7) India LAC7 (6) Oth. Adv. Economies (7) Number of Firms Average Number of Firms Issuing Bonds Asia (5) G7 (7) LAC7 (6) Oth. Adv. Economies (6) 24

25 Prudential oversight lags in smaller LAC countries; deficits in legal protection and independence affect most of LAC BCP Assessments Caribbean (Mean Score) Other Risks Institutional Framework.5 1 Consolidaded Supervision Authorizations Corrective Actions BCP Assessments Rest of LAC (Mean Score) Supervision Capital Institutional Framework Other Risks.5 1 Consolidaded Supervision 1.5 Market Discipline Credit Risk Internal Control Benchmark Observed Value Authorizations Corrective Actions Supervision Capital Market Discipline Credit Risk Internal Control Benchmark Observed Value 25

26 The Key Issues and Challenges Ahead 26

27 Closing the credit gap it is mainly about avoiding crises, improving contract rights and promoting real growth Explained Credit Gap based on LAC7 Median Values: Contract Enforcement Index 1.98 Legal Rights Index.65 Credit Information Index Property Rights Index.34 GDP Growth* 2.8 Credit Crushes** 6.27 Total Explained Gap 12.4 Gap 15.7 Percent of Total Gap Explained 77% *In annualized terms. ** The dummy shows the number of crashes as a share of total observations. A country can import information and consumer loan technology But it cannot import good contractual institutions 27

28 Policies are needed to address lack of trust and low demand among households, for payments & savings Alrededor del 51% de los hogares tiene una cuenta bancaria Incluyendo a familias de mediano ingreso Entre los que no tienen cuentas: 61% alude falta de fondos 19% dice falta de trabajo 11% no confía en las instituciones financieras o no califica 7% se queja de los altos costos De las familias que ahorran, solo el 4 usa el sistema financiero Fuente: Martínez Pería (211)

29 and for credit services, where collateral constraints or low income also play a major role Alrededor del 21% de los hogares tiene un préstamo y el 62% nunca solicitó uno De los que reciben crédito, solo 65% lo toma de instituciones financieras formales, pese a menores costos Entre los que no solicitaron Cerca del 7 dijo que lo consideraban muy riesgoso y preferían no estar endeudados 24% dijo no solicitar debido a ingresos o garantías insuficientes Fuente: Martínez Pería (211)

30 Unlocking long-term financial contracts (a) The equity gap conundrum Turnover Ratio 2 Average Turnover Ratio During the 2s Asia China Eastern Europe G7 India LAC7 Oth. Adv. Economies Domestic Turnover - Firms with DR Programs Total Turnover - Firms with DR Programs Domestic Turnover - All Firms Domestic and International Value Traded as a % of Domestic Market Capitalization 2.5 As bigger stocks moved abroad, smaller stocks have been left in shallow waters Weak governance and wealth concentration are also important drivers Turnover Ratio Asia China Eastern Europe G7 India LAC7 Oth. Adv. Economies Regional predominance of buy-and-hold pension funds over mutual funds is likely another driver Path forward is unclear Domestic Turnover International Turnover 3

31 Unlocking long-term financial contracts (b) Extending debt horizons of final investors Anglo-Saxon solution faces systemic pitfalls Short-termism huge maturity transformation Liquidity fallacy reliance on market liquidity is collectively inconsistent (free riding on way up, flights to cash on way down) LAC has problems of its own, beyond weak contractual Asset managers charge high fees and spend mostly in marketing rather than asset management Shortage of good long-term paper What to do? Take advantage of mandatory participation in pension funds to develop a robust annuities industry Use standardization & regulation to extend investment horizons of asset managers, without unduly undermining monitoring 31

32 Enhancing the developmental role of the state State should play to its strengths ability to resolve collective frictions that limit coordination and participation Markets have a comparative advantage in resolving agency frictions, hence there is much more scope for complementarity than competition Before taking risk, the state can do much e.g., catalytic interventions, default options, mandatory participation, common infrastructures, etc. There is room for the state to bear risk provided that: Justification is well grounded, on risk aversion and participation failures, rather than on pure externalities and/or agency failures Ensure that government guarantees/loans are the right instrument Ensure that private sector is crowded in sharing risk is necessary for good resolution to agency problems and appropriate risk pricing Auctions, re-insurance, full pricing including of tail risks 32

33 Enhancing the stabilization role of the state the new prudential agenda An even stronger case in LAC for macro-prudential policy Higher potential for excess fluctuations Already over-burdened monetary policy Exchange rate flexibility enhances macro-prudential independence LAC is not behind (dynamic provisions, countercyclical reserves, etc.) Dealing with challenges in micro-systemic regulation Limiting regulatory arbitrage The outer boundaries: over-ambitious regulatory perimeter? The inner boundaries: consolidated oversight in a silo environment Dealing with SIFIs a big problem in LAC Establishing systemic supervision New skills and challenging coordination issues (CB primus inter pares) Managing the unavoidable discretion will be a tall order in LAC 33

34 Thank you! 34