Financial Institutions and Regulation for Development

Introduction

This proposal consists of three empirical projects to advance our understanding of the specific conditions and frictions faced by financial institutions operating in low and middle-income countries. Understanding these aspects is crucial to elaborate policies of financial regulation and government intervention that promote structural transformation and development.

Project 1: Ethnic Banking and Central Bank Independence

This project plans to study the political economy frictions behind financial regulation in Africa.

Objectives

• Combine bank balance sheets and information on bank chief executive officers (CEOs).
• Measure the ethnic connotation of banks and the co-ethnicity between CEOs and regulators.
• Investigate the existence of ethnic favoritism in banking.
• Analyze the political use of financial regulation.
• Examine the role of central bank independence in alleviating this friction.

Project 2: Branch Organization, Multiculturalism and Conflict

Organizations decide their internal hierarchy considering the tradeoff between the use of knowledge and the internal frictions in communication and coordination.

Challenges

• These frictions may be particularly high in the presence of a multicultural workforce.
• Conflict may exacerbate within-organization differences.

Methodology

• Build new data on hierarchy and management practices among Ethiopian bank branches.
• Conduct an experimental survey of lending discrimination.

Goals

• Study the effect of conflict on the internal organization of banks.
• Analyze the impact on their hierarchy and effects on lending markets.

Project 3: Market Incompleteness and Non-Performing Loans (NPLs)

Structural transformation implies a move from low to high-productivity sectors.

Issues

• Incomplete markets prevent banks from selling loans from low-productivity sectors.
• Banks are obliged to hold NPLs, which depresses the financing of structural transformation.

Focus

This project plans to study the introduction of the first Asset Management Companies focusing on NPLs in China, with heterogeneous presence across firms and cities.