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Information sharing, credit booms, and financial stability Samuel Gu - - PowerPoint PPT Presentation

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Information sharing, credit booms, and financial stability Samuel Gu erineau CERDI, Universit e dAuvergne Florian L eon CREA, University of Luxembourg ESRC-DFID Growth Research Program Financial Volatility, Macroprudential

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Information sharing, credit booms, and financial stability

Samuel Gu´ erineau CERDI, Universit´ e d’Auvergne Florian L´ eon CREA, University of Luxembourg ESRC-DFID Growth Research Program Financial Volatility, Macroprudential Regulation and Economic Growth in Low-Income Countries (Grant No. ES/L012022/1)

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 1 / 28

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Outline

1

Introduction

2

Data and variables

3

Empirical model

4

Results

5

Conclusion

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 2 / 28

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Introduction

Introduction : Motivation

This paper motivated by several strands of literatures related to the vulnerability

  • f financial systems

1

Credit boom and financial fragility

◮ Credit boom is a main driver of financial crisis episodes ◮ Some questions remain

  • How can we limit the occurrence of credit booms ?
  • How can we alleviate their detrimental impact ?

2

Recent development of information sharing

◮ Development of IS around the World IS in the world ◮ IS have been created to favor credit access ◮ But they could affect financial fragility 3

Few papers on financial fragility in developing countries

◮ Episodes of financial fragility are less frequent in low-income countries ◮ But they may induce profound consequences

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 3 / 28

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Introduction

Introduction : Conceptual framework

Existing literature focuses on the direct impact of information sharing (IS)

1

Theory :

  • IS ց fragility : Moral hazard, adverse selection, over-borrowing
  • IS ր fragility : Credit composition

2

Empirical papers

  • IS tend to strength financial stability (micro and macro evidence)
  • But how ?

We study its indirect effect trough credit booms

(1) (3) (2) (3)

Information sharing Credit booms Financial fragility

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 4 / 28

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Introduction

Introduction : An overview

We combine data from 159 countries over the period 2008-2014 divided in two groups

1

80 ”advanced” economies (High-income and upper-middle income countries)

2

79 ”developing” economies (Low-income and lower-middle income countries)

What we do ?

1

Net effect of IS on financial fragility

2

Transmission channels

1

Attenuation effect of the detrimental effect of credit boom

2

Impact on the occurrence of credit booms

Main results

1

IS reduces financial fragility ; no distinction between developing and other countries

2

Depth of IS limits the occurrence of credit booms (but coverage does not matter)

3

IS alleviates the detrimental effect of credit booms but only in advanced economies

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 5 / 28

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Data and variables

Data and variables

Datasets

◮ Bankscope (financial fragility) ◮ Doing Business (information sharing) ◮ WDI and IFS (other variables)

Sample - 159 countries including :

◮ 79 developing countries (GNI per capita < US$ 4,125) ◮ 80 emerging and developed countries (GNI pc ≥ US$ 4,125)

Period : 2008-2014

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 6 / 28

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Data and variables

Data and variables

Dependent variable : Financial fragility Measurement ∆( NPLs Loans ) ≥ 3points

◮ Ratio of NPLs to loans is computed at the national level (weighted average) ◮ Authors’ calculation using Bankscope database

Advantages

◮ Available for a large number of countries, including low income countries ◮ Identify episodes that were not transformed into financial crises ◮ Why do not we use financial crises dataset ?

  • Limited number of financial crises since 2005 in low-income countries (data

before 2005 cannot be exploited due to the lack of data on information sharing mechanisms)

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 7 / 28

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Data and variables

Data and variables

Independent variables Credit boom (CB)

◮ 2 criteria are used to define a credit boom 1

An increase of the ratio of credit to GDP during at least three consecutive years

2

The average of increases is 5 percentage points by year

◮ Data are extracted from WDI

Information sharing (IS)

◮ Two alternative measures 1

Depth of credit information

2

Coverage of credit registries and credit bureaus

◮ Authors’ calculation using Doing Business data

Control variables (X)

1

Macroeconomic factors

  • GDP per capita, growth, inflation, Exchange rate vol

2

Financial factors

  • PC/GDP, capital inflows, market concentration
  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 8 / 28

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Empirical model Baseline model

Empirical model

1st step : Baseline model (net effect of IS) Pr(BSDit) = α + βISit + ΓXit + εit Where

◮ BSDit : dummy equals to 1 if a country i experienced an episode of financial

fragilityin year t

◮ ISit : Indicator of credit information sharing (depth and coverage) ◮ Xit : Control variables (including time dummies)

Method

◮ Econometric method : Random-effect probit ◮ Binary nature of dependent variable ◮ Random effect : Control for unobserved heterogeneity

Expected result : CIS reduces financial fragility (β < 0)

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 9 / 28

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Empirical model Baseline model

Empirical model

1st step : Baseline model (net effect of IS) Pr(BSDit) = α + βISit + ΓXit + εit Where

◮ BSDit : dummy equals to 1 if a country i experienced an episode of financial

fragilityin year t

◮ ISit : Indicator of credit information sharing (depth and coverage) ◮ Xit : Control variables (including time dummies)

Method

◮ Econometric method : Random-effect probit ◮ Binary nature of dependent variable ◮ Random effect : Control for unobserved heterogeneity

Expected result : IS reduces financial fragility (β < 0)

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 10 / 28

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Empirical model Transmission channels

Empirical model

2nd step : Transmission channels

1

Inclusion of credit booms (CB) Pr(BSDit) = α + βISit + δCBit + ΓXit + εit

◮ Expected results : β < 0 and δ > 0 2

Interaction between IS and CB Pr(BSDit) = α + βISit + δCBit + γISit ∗ CBit + ΓXit + εit

◮ Expected results : β < 0, δ > 0 and gamma < 0 3

Determinants of CB Pr(CBit) = α′ + β′ISit + Γ′Xit + εit

◮ Expected result : Sign of β′ can be positive or negative

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 11 / 28

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Empirical model Transmission channels

Empirical model

2nd step : Transmission channels

1

Inclusion of credit booms (CB) Pr(BSDit) = α + βISit + δCBit + ΓXit + εit

◮ Expected results : β < 0 and δ > 0 2

Interaction between IS and CB Pr(BSDit) = α + βISit + δCBit + γISit ∗ CBit + ΓXit + εit

◮ Expected results : β < 0, δ > 0 and gamma < 0 3

Determinants of CB Pr(CBit) = α′ + β′ISit + Γ′Xit + εit

◮ Expected result : Sign of β′ can be positive or negative

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 12 / 28

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Empirical model Transmission channels

Empirical model

2nd step : Transmission channels

1

Inclusion of credit booms (CB) Pr(BSDit) = α + βISit + δCBit + ΓXit + εit

◮ Expected results : β < 0 and δ > 0 2

Interaction between IS and CB Pr(BSDit) = α + βISit + δCBit + γISit ∗ CBit + ΓXit + εit

◮ Expected results : β < 0, δ > 0 and gamma < 0 3

Determinants of CB Pr(CBit) = α′ + β′ISit + Γ′Xit + εit

◮ Expected result : Sign of β′ can be positive or negative

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 13 / 28

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SLIDE 14

Empirical model Transmission channels

Empirical model

2nd step : Transmission channels

1

Inclusion of credit booms (CB) Pr(BSDit) = α + βISit + δCBit + ΓXit + εit

◮ Expected results : β < 0 and δ > 0 2

Interaction between IS and CB Pr(BSDit) = α + βISit + δCBit + γISit ∗ CBit + ΓXit + εit

◮ Expected results : β < 0, δ > 0 and gamma < 0 3

Determinants of CB Pr(CBit) = α′ + β′ISit + Γ′Xit + εit

◮ Expected result : Sign of β′ can be positive or negative

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 14 / 28

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Results Baseline results

Baseline results

Table: Baseline model

All countries GNI pc < US$4,125 GNI pc ≥ US$4,125 (1) (2) (3) (4) (5) (6) Depth

  • 0.0149***
  • 0.0094**
  • 0.0255**

(-2.75) (-2.07) (-2.43) Coverage

  • 0.0011***
  • 0.0006**
  • 0.0020**

(-2.70) (-2.07) (-2.04) Control Yes Yes Yes Yes Yes Yes # Obs. 977 977 499 499 478 478 # Countries 159 159 80 80 79 79

IS reduces financial fragility (β < 0)

◮ No distinction between depth and coverage ◮ No distinction between developing and advanced economies

Results are robust to

◮ Econometric method ◮ Sample ◮ Change of dependent variable ◮ Endogeneity of IS

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 15 / 28

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Results Baseline results

Baseline results

Table: Baseline model

All countries GNI pc < US$4,125 GNI pc ≥ US$4,125 (1) (2) (3) (4) (5) (6) Depth

  • 0.0149***
  • 0.0094**
  • 0.0255**

(-2.75) (-2.07) (-2.43) Coverage

  • 0.0011***
  • 0.0006**
  • 0.0020**

(-2.70) (-2.07) (-2.04) Control Yes Yes Yes Yes Yes Yes # Obs. 977 977 499 499 478 478 # Countries 159 159 80 80 79 79

IS reduces financial fragility (β < 0)

◮ No distinction between depth and coverage ◮ No distinction between developing and advanced economies

Results are robust to

◮ Econometric method ◮ Sample ◮ Change of dependent variable ◮ Endogeneity of IS

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 16 / 28

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Results Baseline results

Baseline results

Table: Baseline model

All countries GNI pc < US$4,125 GNI pc ≥ US$4,125 (1) (2) (3) (4) (5) (6) Depth

  • 0.0149***
  • 0.0094**
  • 0.0255**

(-2.75) (-2.07) (-2.43) Coverage

  • 0.0011***
  • 0.0006**
  • 0.0020**

(-2.70) (-2.07) (-2.04) Control Yes Yes Yes Yes Yes Yes # Obs. 977 977 499 499 478 478 # Countries 159 159 80 80 79 79

IS reduces financial fragility (β < 0)

◮ No distinction between depth and coverage ◮ No distinction between developing and advanced economies

Results are robust to

◮ Econometric method ◮ Sample ◮ Change of dependent variable ◮ Endogeneity of IS

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 17 / 28

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Results Transmission channels

Transmission channels : 1/Inclusion of Credit boom

Table: Inclusion of Credit boom

All countries GNI pc < US$4,125 GNI pc ≥ US$4,125 (1) (2) (3) (4) (5) (6) Depth

  • 0.0132***
  • 0.0096*
  • 0.0197**

(-2.47) (-1.95) (-2.19) Coverage

  • 0.0009***
  • 0.0005*
  • 0.0018**

(-2.29) (-1.83) (-1.88) CB 0.1073*** 0.1054*** 0.0468** 0.0442** 0.1721*** 0.1719*** (4.16) (4.08) (2.49) (2.37) (3.04) (3.12) Control Yes Yes Yes Yes Yes Yes # Obs. 977 977 499 499 478 478 # Countries 159 159 80 80 79 79

IS reduces financial fragility (β < 0) CB increases financial fragility (δ > 0)

◮ Effect of CB is particularly high in developing countries

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 18 / 28

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Results Transmission channels

Transmission channels : 1/Inclusion of Credit boom

Table: Inclusion of Credit boom

All countries GNI pc < US$4,125 GNI pc ≥ US$4,125 (1) (2) (3) (4) (5) (6) Depth

  • 0.0132***
  • 0.0096*
  • 0.0197**

(-2.47) (-1.95) (-2.19) Coverage

  • 0.0009***
  • 0.0005*
  • 0.0018**

(-2.29) (-1.83) (-1.88) CB 0.1073*** 0.1054*** 0.0468** 0.0442** 0.1721*** 0.1719*** (4.16) (4.08) (2.49) (2.37) (3.04) (3.12) Control Yes Yes Yes Yes Yes Yes # Obs. 977 977 499 499 478 478 # Countries 159 159 80 80 79 79

IS reduces financial fragility (β < 0) CB increases financial fragility (δ > 0)

◮ Effect of CB is particularly high in developing countries

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 19 / 28

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Results Transmission channels

Transmission channels : 1/Inclusion of Credit boom

Table: Inclusion of Credit boom

All countries GNI pc < US$4,125 GNI pc ≥ US$4,125 (1) (2) (3) (4) (5) (6) Depth

  • 0.0132***
  • 0.0096*
  • 0.0197**

(-2.47) (-1.95) (-2.19) Coverage

  • 0.0009***
  • 0.0005*
  • 0.0018**

(-2.29) (-1.83) (-1.88) CB 0.1073*** 0.1054*** 0.0468** 0.0442** 0.1721*** 0.1719*** (4.16) (4.08) (2.49) (2.37) (3.04) (3.12) Control Yes Yes Yes Yes Yes Yes # Obs. 977 977 499 499 478 478 # Countries 159 159 80 80 79 79

IS reduces financial fragility (β < 0) CB increases financial fragility (δ > 0)

◮ Effect of CB is particularly high in developing countries

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 20 / 28

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Results Transmission channels

Transmission channels : 2/Interactions btw CB and IS

Table: Interactions between CB and IS

All countries GNI pc < US$4,125 GNI pc ≥ US$4,125 (1) (2) (3) (4) (5) (6) Depth

  • 0.0114*
  • 0.0149
  • 0.0183**

(-1.86) (-1.42) (-2.40) Depth*IS

  • 0.0374*
  • 0.0528*
  • 0.0111

(-1.64) (-1.52) (-0.35) Coverage

  • 0.0006*
  • 0.0067
  • 0.0013*

(-1.76) (-1.52) (-1.95) Coverage*IS

  • 0.0034***
  • 0.0035***
  • 0.0036

(-2.79) (-2.58) (-1.06) CB 0.307*** 0.310*** 0.345** 0.307** 0.249* 0.305*** (3.30) (4.37) (2.90) (3.45) (1.82) (2.30) Control Yes Yes Yes Yes Yes Yes # Obs. 977 977 499 499 478 478 # Countries 159 159 80 80 79 79

All countries :

◮ IS reduces financial fragility (β < 0) ◮ CB increases financial fragility (δ > 0) ◮ IS mitigates the detrimental impact of CB (γ < 0)

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 21 / 28

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Results Transmission channels

Transmission channels : 2/Interactions btw CB and IS

Table: Interactions between CB and IS

All countries GNI pc < US$4,125 GNI pc ≥ US$4,125 (1) (2) (3) (4) (5) (6) Depth

  • 0.0114*
  • 0.0149
  • 0.0183**

(-1.86) (-1.42) (-2.40) Depth*IS

  • 0.0374*
  • 0.0528*
  • 0.0111

(-1.64) (-1.52) (-0.35) Coverage

  • 0.0006*
  • 0.0067
  • 0.0013*

(-1.76) (-1.52) (-1.95) Coverage*IS

  • 0.0034***
  • 0.0035***
  • 0.0036

(-2.79) (-2.58) (-1.06) CB 0.307*** 0.310*** 0.345** 0.307** 0.249* 0.305*** (3.30) (4.37) (2.90) (3.45) (1.82) (2.30) Control Yes Yes Yes Yes Yes Yes # Obs. 977 977 499 499 478 478 # Countries 159 159 80 80 79 79

Advanced countries :

◮ IS reduces financial fragility trough its effect on CB (β = 0 and γ < 0)

Developing countries :

◮ Direct effect of IS (β < 0 and γ = 0)

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 22 / 28

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Results Transmission channels

Transmission channels : 2/Interactions btw CB and IS

Table: Interactions between CB and IS

All countries GNI pc < US$4,125 GNI pc ≥ US$4,125 (1) (2) (3) (4) (5) (6) Depth

  • 0.0114*
  • 0.0149
  • 0.0183**

(-1.86) (-1.42) (-2.40) Depth*IS

  • 0.0374*
  • 0.0528*
  • 0.0111

(-1.64) (-1.52) (-0.35) Coverage

  • 0.0006*
  • 0.0067
  • 0.0013*

(-1.76) (-1.52) (-1.95) Coverage*IS

  • 0.0034***
  • 0.0035***
  • 0.0036

(-2.79) (-2.58) (-1.06) CB 0.307*** 0.310*** 0.345** 0.307** 0.249* 0.305*** (3.30) (4.37) (2.90) (3.45) (1.82) (2.30) Control Yes Yes Yes Yes Yes Yes # Obs. 977 977 499 499 478 478 # Countries 159 159 80 80 79 79

Advanced countries :

◮ IS reduces financial fragility trough its effect on CB (β = 0 and γ < 0)

Developing countries :

◮ Direct effect of IS (β < 0 and γ = 0)

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 23 / 28

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Results Transmission channels

Transmission channels : 3/Determinants of CB

Table: Determinants of CB

All countries GNI pc < US$4,125 GNI pc ≥ US$4,125 (1) (2) (3) (4) (5) (6) Depth

  • 0.0051*
  • 0.0146***
  • 0.0019*

(-1.88) (-2.61) (-1.75) Coverage

  • 0.0002
  • 0.0005

0.0000 (-1.09) (-1.40) (0.22) Control Yes Yes Yes Yes Yes Yes # Obs. 977 977 499 499 478 478 # Countries 159 159 80 80 79 79

Depth of IS limits the occurrence of credit booms (β′ < 0) Coverage does not affect credit booms (β′ = 0)

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 24 / 28

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Results Transmission channels

Transmission channels : 3/Determinants of CB

Table: Determinants of CB

All countries GNI pc < US$4,125 GNI pc ≥ US$4,125 (1) (2) (3) (4) (5) (6) Depth

  • 0.0051*
  • 0.0146***
  • 0.0019*

(-1.88) (-2.61) (-1.75) Coverage

  • 0.0002
  • 0.0005

0.0000 (-1.09) (-1.40) (0.22) Control Yes Yes Yes Yes Yes Yes # Obs. 977 977 499 499 478 478 # Countries 159 159 80 80 79 79

Depth of IS limits the occurrence of credit booms (β′ < 0) Coverage does not affect credit booms (β′ = 0)

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 25 / 28

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Conclusion

Conclusion

Summary of the results

1

IS reduces financial fragility

2

Direct effect of IS (controlling for CB)

3

IS (depth) has an impact on the occurrence of credit booms

4

IS mitigates the negative effect of CB but only for emerging and developing countries

5

CB is a strong determinants of financial fragility for both developing and developed countries

Research perspective

◮ Understanding the precise effect of IS on credit booms

  • Why depth matter and coverage do not ?

◮ Alternative channels through which IS affect stability ?

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 26 / 28

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SLIDE 27

Conclusion

Introduction : Motivation

Figure: Quality of PCR and PCB, by group of countries

0,5 1 1,5 2 2,5 3 3,5 4 4,5 5 2006 2007 2008 2009 2010 2011 2012 2013 2014 LIC MIC (lower) MIC (upper) HIC

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 27 / 28

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SLIDE 28

Conclusion

Introduction : Motivation

Figure: Coverage of PCR and PCB, by group of countries

10 20 30 40 50 60 70 80 2006 2007 2008 2009 2010 2011 2012 2013 2014 LIC MIC (lower) MIC (upper) HIC Return

  • S. Gu´

erineau and F. L´ eon Info sharing, credit booms, and financial stability ESRC-DFID Project 28 / 28