This document provides an overview of the financial services sector and related concepts. It discusses the history of the sector and how technology has changed operations. The future outlook is uncertain given recent market collapses. It also defines primary and secondary markets, debt and equity, and money and capital markets. Additionally, it outlines different types of financial regulations and describes the US financial industry and subsectors. Finally, it analyzes Pakistan's economic growth rate, inflation rate, and tax-to-GDP ratio over the past decades.
I’m a young Pakistani Blogger, Academic Writer, Freelancer, Quaidian & MPhil Scholar, Quote Lover, Co-Founder at Essar Student Fund & Blueprism Academia, belonging from Mehdiabad, Skardu, Gilgit Baltistan, Pakistan.
I am an academic writer & freelancer! I can work on Research Paper, Thesis Writing, Academic Research, Research Project, Proposals, Assignments, Business Plans, and Case study research.
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Management Sciences, Business Management, Marketing, HRM, Banking, Business Marketing, Corporate Finance, International Business Management
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Agcapita is Canada's only RRSP and TFSA eligible farmland fund and is part of a family of funds with over $100 million in assets under management. Agcapita believes farmland is a safe investment, that supply is shrinking and that unprecedented demand for "food, feed and fuel" will continue to move crop prices higher over the long-term. Agcapita created the Farmland Investment Partnership to allow investors to add professionally managed farmland to their portfolios.
I’m a young Pakistani Blogger, Academic Writer, Freelancer, Quaidian & MPhil Scholar, Quote Lover, Co-Founder at Essar Student Fund & Blueprism Academia, belonging from Mehdiabad, Skardu, Gilgit Baltistan, Pakistan.
I am an academic writer & freelancer! I can work on Research Paper, Thesis Writing, Academic Research, Research Project, Proposals, Assignments, Business Plans, and Case study research.
Expertise:
Management Sciences, Business Management, Marketing, HRM, Banking, Business Marketing, Corporate Finance, International Business Management
For Order Online:
Whatsapp: +923452502478
Portfolio Link: https://blueprismacademia.wordpress.com/
Email: arguni.hasnain@gmail.com
Follow Me:
Linkedin: arguni_hasnain
Instagram : arguni.hasnain
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Agcapita is Canada's only RRSP and TFSA eligible farmland fund and is part of a family of funds with over $100 million in assets under management. Agcapita believes farmland is a safe investment, that supply is shrinking and that unprecedented demand for "food, feed and fuel" will continue to move crop prices higher over the long-term. Agcapita created the Farmland Investment Partnership to allow investors to add professionally managed farmland to their portfolios.
Analysis of the Credit Suisse Asia Corporate Bond FundMuhammad Aqdas
It is looked as to how the Credit Suisse Asia Corporate Bond Fund can be promoted to buyers. The focus is on analyzing and evaluating the world and then specifically the Chinese economic situation, explaining the prospects and challenges ahead and then commenting on how the fund should be promoted based on this analysis.
Growth-Debt Nexus: An Examination of Public Debt Levelsand Debt Crisis in Zim...iosrjce
Government debt is an indirect debt of the taxpayers, and can be classified as internal or external.
Debt crisis is the general term for a proliferation of massive public debt relative to tax revenues.Public debt
enables governments to invest in critical areas of the economy where the capacity of tax revenue to undertake
these projects may be limited or in situations where printing additional money will disrupt the stability of the
economy. Government borrows in order defer difficult but necessary reforms such as the imposition of taxes
which might be necessary to generate revenue for development. Countries with high public debt tend to grow
slowly. The study examines the origin of debt crisis in Zimbabwe, debt nature, causes, consequences and
possible ways of reducing the debt. The study uses 1980-2013 data to run an OLS model on economic growth
using STATA Econometric Software, in an effort to explore the effect of external debt. The regression results
shows that public debt has a negative effect on economic growth in Zimbabwe, which has varying theories
prevailing. The study concludes by encouraging the government not to borrow unnecessarily, and to use
borrowed funds for investment projects, rather than on consumption expenditure
A Case Study Analysis on the Asian Financial Crisis of 1997 and Zapa ChemicalsSadman Ahmed
Asian Financial Crisis of 1997:-
The Asian crisis was one of the worst financial disasters in the history of Thailand. The investors moved away large sums money away, inflation spiraled out of control, and it ultimately put pressure on the exchange rates of the Baht. Due to Thailand’s problems alone, the effect of the crisis spread along different countries in Asia. The impacts prove how integrated the economies of today are. Much of the fault lies on the failed policies of the government and weak regulatory regime.
Zapa Chemicals (risk management)
The exchange rate exposure and the legal hurdles can be quite a burden when transferring funds across the borders. In the case of Zapa Chemicals, the tax filing problem did not help them to transfer funds. They didn’t know when exactly the funds would be available for receiving. The risk management of the firm is quite a hefty task for foreign companies to successfully pursue.
2011 promises to be the year of commodities. Every global event in the last three
years has either been triggered by commodities or has, in a roundabout way, led to
increased influence of commodity prices on the macro-economic environment.
The recent events in Egypt are a case in point. Even in the ongoing currency wars,
commodity currencies like the Australian Dollar and Brazilian Real have shown genuine
muscle and there is nothing on the horizon to show that the trend is changing.
Western governments are hopelessly addicted to deficit financing while refusing to address looming funding issues - with apologies to the embarrassingly foolish Angela Merkel, politicians can no more successfully “battle” the markets than you and I can successfully “battle” gravity. Petrocapita is an investment trust built around the premise that demand for energy will continue to move prices higher over the long-term. Petrocapita was created to allow investors to add professionally managed oil & gas assets directly to their portfolios.
Here is our recent revision webinar on commercial banks and the UK economy. We look at how commercial banks made a profit (or loss!) and consider the factors that affect how much they can lend out.
The thrust of this study was to determine the impact of micro credit on the MSMEs sector in CRS,
Nigeria. Three hypotheses were formulated from the research questions and tested by using chi-square statistic
to validate the truth or otherwise of the hypotheses. Ex-post factor research design was adopted and a sample
size of 158 respondents was selected and used for the study. A structured questionnaire was used in obtaining
the data. In testing the hypotheses, all the calculated chi-square values were greater than the critical chi-square
value at the given level of significance and degree of freedom. This resulted in rejecting the null hypotheses
while the alternate hypotheses were retained. The results indicated that micro credit programmes have
significant effect on MSMEs in CRS. Equally, credit administration has a significant effect on the performance
of microcredit programmes and that collateral requirements on MSMEs have significant effect on obtaining
credit from microfinance institutions in CRS. Arising from the findings, the study recommends that government
should make more microcredit programmes available for the development of MSMEs in CRS. There should be
efficiency in credit administration on the part of both government and the private sector so as to enhance the
performance of microcredit programmes in CRS and also collateral requirements should be minimized, while
low interest rate should be charged on micro, small and medium enterprises so as to enhance obtaining of credit
facilities from microfinance institutions in the State.
Analysis of the Credit Suisse Asia Corporate Bond FundMuhammad Aqdas
It is looked as to how the Credit Suisse Asia Corporate Bond Fund can be promoted to buyers. The focus is on analyzing and evaluating the world and then specifically the Chinese economic situation, explaining the prospects and challenges ahead and then commenting on how the fund should be promoted based on this analysis.
Growth-Debt Nexus: An Examination of Public Debt Levelsand Debt Crisis in Zim...iosrjce
Government debt is an indirect debt of the taxpayers, and can be classified as internal or external.
Debt crisis is the general term for a proliferation of massive public debt relative to tax revenues.Public debt
enables governments to invest in critical areas of the economy where the capacity of tax revenue to undertake
these projects may be limited or in situations where printing additional money will disrupt the stability of the
economy. Government borrows in order defer difficult but necessary reforms such as the imposition of taxes
which might be necessary to generate revenue for development. Countries with high public debt tend to grow
slowly. The study examines the origin of debt crisis in Zimbabwe, debt nature, causes, consequences and
possible ways of reducing the debt. The study uses 1980-2013 data to run an OLS model on economic growth
using STATA Econometric Software, in an effort to explore the effect of external debt. The regression results
shows that public debt has a negative effect on economic growth in Zimbabwe, which has varying theories
prevailing. The study concludes by encouraging the government not to borrow unnecessarily, and to use
borrowed funds for investment projects, rather than on consumption expenditure
A Case Study Analysis on the Asian Financial Crisis of 1997 and Zapa ChemicalsSadman Ahmed
Asian Financial Crisis of 1997:-
The Asian crisis was one of the worst financial disasters in the history of Thailand. The investors moved away large sums money away, inflation spiraled out of control, and it ultimately put pressure on the exchange rates of the Baht. Due to Thailand’s problems alone, the effect of the crisis spread along different countries in Asia. The impacts prove how integrated the economies of today are. Much of the fault lies on the failed policies of the government and weak regulatory regime.
Zapa Chemicals (risk management)
The exchange rate exposure and the legal hurdles can be quite a burden when transferring funds across the borders. In the case of Zapa Chemicals, the tax filing problem did not help them to transfer funds. They didn’t know when exactly the funds would be available for receiving. The risk management of the firm is quite a hefty task for foreign companies to successfully pursue.
2011 promises to be the year of commodities. Every global event in the last three
years has either been triggered by commodities or has, in a roundabout way, led to
increased influence of commodity prices on the macro-economic environment.
The recent events in Egypt are a case in point. Even in the ongoing currency wars,
commodity currencies like the Australian Dollar and Brazilian Real have shown genuine
muscle and there is nothing on the horizon to show that the trend is changing.
Western governments are hopelessly addicted to deficit financing while refusing to address looming funding issues - with apologies to the embarrassingly foolish Angela Merkel, politicians can no more successfully “battle” the markets than you and I can successfully “battle” gravity. Petrocapita is an investment trust built around the premise that demand for energy will continue to move prices higher over the long-term. Petrocapita was created to allow investors to add professionally managed oil & gas assets directly to their portfolios.
Here is our recent revision webinar on commercial banks and the UK economy. We look at how commercial banks made a profit (or loss!) and consider the factors that affect how much they can lend out.
The thrust of this study was to determine the impact of micro credit on the MSMEs sector in CRS,
Nigeria. Three hypotheses were formulated from the research questions and tested by using chi-square statistic
to validate the truth or otherwise of the hypotheses. Ex-post factor research design was adopted and a sample
size of 158 respondents was selected and used for the study. A structured questionnaire was used in obtaining
the data. In testing the hypotheses, all the calculated chi-square values were greater than the critical chi-square
value at the given level of significance and degree of freedom. This resulted in rejecting the null hypotheses
while the alternate hypotheses were retained. The results indicated that micro credit programmes have
significant effect on MSMEs in CRS. Equally, credit administration has a significant effect on the performance
of microcredit programmes and that collateral requirements on MSMEs have significant effect on obtaining
credit from microfinance institutions in CRS. Arising from the findings, the study recommends that government
should make more microcredit programmes available for the development of MSMEs in CRS. There should be
efficiency in credit administration on the part of both government and the private sector so as to enhance the
performance of microcredit programmes in CRS and also collateral requirements should be minimized, while
low interest rate should be charged on micro, small and medium enterprises so as to enhance obtaining of credit
facilities from microfinance institutions in the State.
Research conducted as an assignment in our class Mobile Reputations, Collaborative Consumption in Sharing Economy, at Panteion University. Featuring results about Gamers, collaborating activities in gaming, their gaming and social media habits, their mobile-self and how all of these are combined in their life. Project by Sofia-Maria Russu, Agapi Mirgioti, Nadia Sinekoglou and Elena Constadinidy.
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ICMA has prepared a paper for policy makers about why corporate bond markets are so important for economic growth, for investors, for companies, and for governments, around the world; and why it is therefore essential that laws and regulations that affect them avoid any unintended adverse consequences that could inhibit those markets.
The Financial Situation in the World by Wouter van der StokFelix Meißner
The Financial Situation in the World” by Wouter van der Stok
Mr. Van der Stok will present a brief history of the present global Economic/Financial Crisis, an analysis of future developments of this Crisis over the next 3 to10 years and how this will affect, without any exception, "me" as a person, family, business, city, nation and groups of nations
HERE YOU FIND THE RECORDING:
http://tinyurl.com/5vcl5hd
Week-1 Into to Money and Bankingand Basic Overview of U.S. Fin.docxalanfhall8953
Week-1 Into to Money and Banking
and Basic Overview of U.S. Financial System
Money and Banking Econ 311
Instructor: Thomas L. Thomas
Financial markets transfer funds from people who have excess available funds to people who have a shortage.
They promote grater economic efficiency by channeling funds from people who do not have a productive use for them to those who do.
Well functioning financial markets are a key factor in producing economic growth, where as, poor functioning financial markets are a major reason many countries in the world remain poor.
Financial Markets
A security or financial instrument is a claim on the issuer’s future income or assets.
A bond is a debt security (IOU) that promises to make payments periodically for a specified period of time.
The bond market is especially important economic activity because it enables businesses and the government to borrow and finance their activities and because it is where interest rates are determined.
An interest rate is the cost of borrowing money or the price to rent (use someone else’s) funds.
Because different interest rates tend to move in unison, economist frequently lump interest rates together and refer to the “interest rate”.
Interest rates are important on a number of levels:
High interest rates retard borrowing
High interest rates induce saving.
Lower interest rates induce borrowing
Lower Interest rates retard saving
Information Asymmetry and Information costs
Why Financial Intermediaries
In the neo-classical world economists have argued financial intermediaries are not necessary. Savers (investors) could manage their risks through diversification.
The logic rests on the perfect market assumption – that is investors can always through their own borrowing and lending compose their portfolios as they see fit, without costs. In such a world there are no bankruptcy costs.
In such a world if taken to the extreme, perfect and complete markets imply that there is no need for financial institutions to intermediate in the financial (capital markets) as every investor (saver) has complete information and can contract with the market at the same terms as banks. E.g. Information Asymmetry
Why Financial Intermediaries Bonds
A common stock (usually called stock) represents a share of ownership in a corporation.
It is usually a security that is a claim on the earnings and assets of the corporation.
Issuing stock and selling it to the public (called a public offering) is a way for corporations to raise the funds to finance their activities.
The stock market is the most widely followed financial market in almost every country that has one – that is why it is generally called the market – here “Wall Street.”
The stock market is also an important factor in business investment decisions, because the price of shares affects the amount of funds that can be raised by selling newly issued stock to finance investment spending. (Note impact examples..
Similar to Financial Sector Performance and Conceptual Framework (20)
Week-1 Into to Money and Bankingand Basic Overview of U.S. Fin.docx
Financial Sector Performance and Conceptual Framework
1. FINANCIAL SECTOR
PERFORMANCE AND
CONCEPTUAL
FRAMEWORK
REPORT FOR CORPORATE FINANCE
GROUP MEMBERS:
ATIF AHMED (9549)
AMMAR SAMANA (11391)
ABDUL SAMAD (11267)
JALALUDDIN KEHR (10038)
MUHAMMAD AZAM SIDDIQUI (1456)
SHAHZAIB ALI (7064)
MUHAMMAD NAJAM NASEEM(10636)
2015
SUBMITTED TO: Mr. NADEEM KHAN
2. Financial Sector Performance and Conceptual Framework
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1. HISTORICAL BACKGROUND OF THE TOPIC:
“Money is the name of the game in the financial services industry. Companies of
this nature are involved in the creation, storage, utilization, management, and
manipulation of money. Such companies include banks, insurance agencies, brokerage
houses, accounting firms, and real estate agencies”.1
OR
“A category of stocks containing firms that provides financial services to
commercial and retail customers. This sector includes banks, investment funds, insurance
companies and real estate”.2
The financial services/sector industry is relatively new, but certain parts of it, such as
insurance coverage, go very far back in history.
Technology, specifically the internet, has drastically effected on the way companies do
business; clients can check their bank accounts online at any time, companies can pay
employees through direct deposit, operations in the securities industry have become
almost completely automated, and insurers can look up information such as a credit
report on potential subscribers more quickly. Computer technology is also used in many
other ways as these firms are dependent on computer generated models to help them
analyze markets and create investment strategies.
Future Outlook The financial services industry has been considerably shaken up by
deregulation, globalization, scandals, and other recent events including the market
collapse. The recent mortgage crisis in the United States, triggered by foreclosures, has
1
Michigan State University
2
Investopedia.com
3. Financial Sector Performance and Conceptual Framework
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resulted in the near collapse of the entire market and potentially a complete overhaul of
the industry from a political standpoint, with increased regulation and government-owned
companies a possibility for the future. There are just too many factors at play to
determine how the industry will recover from the collapse right now.
2. Primary versus Secondary Markets:
Primary markets are securities markets in which newly issued securities are
offered for sale to buyers.
Secondary markets are securities markets in which existing securities that have
previously been issued are resold. The initial issuer raises funds only through the
primary market.
3. Debt versus Equity Markets:
Debt instruments are particular types of securities that require the borrower to
pay the lender certain fixed dollar amounts at regularly scheduled intervals until a
specified time (the maturity date) is reached, regardless of the success or failure
of any investment projects for which the borrowed funds are used.
In contrast, equity is a security that confers on the holder an ownership interest in
the issuer. There are two general categories of equities: "preferred stock" and
"common stock."
4. Financial Sector Performance and Conceptual Framework
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4. Money versus Capital Markets:
The money market is the market for shorter-term securities, generally those
with one year or less remaining to the maturity. Examples: Treasury bills;
negotiable bank certificates of deposit (CDs); commercial paper, Federal
funds etc.
The capital market is the market for longer-term securities, generally those with
more than one year to maturity. Examples: corporate stocks, residential mortgages,
government securities (marketable long-term), state and local government bonds,
bank commercial loans, consumer loans etc.
5. Types of Financial Regulations:
Types of Financial Regulations Objectives
Macro-economic
To maintain control over
aggregate economic activity.
To maintain internal and
external balance.
Allocative
To influence the allocation of
financial resources in favor of
priority activities.
Structural
To control the possible abuse
monopoly power by dominant
firms.
Prudential
To preserve the safety and
soundness of individual
financial institutions and sustain
public confidence in systemic
stability.
Organizational To ensure smooth functioning
5. Financial Sector Performance and Conceptual Framework
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and integrity of financial
markets.
Protective
To provide protection to users of
financial services, especially
consumers and non-professional
investors.
6. The Financial Services Industry in the United States:
Financial markets in the United States are the largest and most liquid in the world. In
2014, finance and insurance represented 7.2 percent (or $1.26 trillion).
Financial services and products help facilitate and finance the export of U.S.
manufactured goods and agricultural products. In 2011, the United States exported $92.5
billion in financial services and had a $23.0 billion surplus in financial services and
insurance trade (excluding re-insurance, the financial services and insurance sectors had a
surplus of $59.5 billion.) The financial services and insurance sectors employed 5.99
million.
6.1. Industry Subsectors US Economy:
Banking as of the end of 2012, the U.S. banking system had $14.45 trillion in assets. It
supports the world’s largest economy with the greatest diversity in banking institutions
and concentration of private credit. In the second quarter of 2013, earnings grew by 23
percent to $42.3 billion, marking the 16 consecutive quarters of rising earnings.
Asset Management the U.S. asset management subsector is unrivaled in its depth and
diversity. U.S. asset managers are currently meeting the pension management needs of
over 55 percent of the global retirement market. Total U.S. pension assets were $18.9
6. Financial Sector Performance and Conceptual Framework
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trillion at the end of 2012. Moreover, if insurance assets and mutual funds are included,
U.S. asset managers held more than $39.6 trillion of long-term conventional assets under
management in 2012, or 45% of the global total for these funds. Conventional funds
were equivalent to 298 percent of U.S. GDP.
Insurance In 2012, the insurance industry’s net premiums written totaled approximately
$1.27 billion. According to the Swiss Reinsurance Company, premiums recorded by life
and health insurers accounted for 45 percent, and premiums by property and casualty
insurers accounted for 55 percent. Additionally, about one-third of all reinsurance sold
worldwide is bought by U.S. firms.
Venture Capital the United States created the venture capital industry and maintains the
oldest and most dominant position worldwide. In 2012, venture capital-backed companies
employed more than 12 million people and generated nearly $3 trillion in revenue.
Respectively, these figures accounted for 11 percent of private sector employment and
annually VC-backed companies have generated revenue equal to 21 percent of U.S. GDP.
7. State of the Economy and Financial Sector in Pakistan:
The growth rate of GDP is extensively utilized measure of performance of any economy.
According to this measure, Pakistan’s economy has recorded an average growth rate of
over 5 percent during 1972-2010 periods. Overall this growth rate is not much
disappointing; however the last four decades were marked with different growth
episodes. The decade of the 1970s started in Pakistan not only with a separation of the
Eastern Wing of the country, but with the nationalization of various segments of the
economy under the nationalization policy followed by Bhutto Government. Against an
7. Financial Sector Performance and Conceptual Framework
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average growth rate of 6.8 percent during the1960s, the growth rate decelerated to almost
5 percent during the 1970s period.
Inflation rate also showed signs of stability from 2000-2003 as it moved from an average
of almost 10 percent in 1990-2000 to 3.15 percent, 3.29 percent and 2.91 percent during
0
1
2
3
4
5
6
7
8
9
10
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Growth rate of real GDP (%)
Growth rate of real GDP
(%)
0
5
10
15
20
25
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Inflation rate (%)
Inflation rate (%)
8. Financial Sector Performance and Conceptual Framework
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2001, 2002 and 2003. However, 2003 onward, it started to move on an upward trajectory
and it reached to as high as 20.29 percent, 13.65 percent and 13.88 percent in year
2008, 2009 and 2010 respectively. In contrast to this, the growth rate during these last
three years of the 2000s decade started to slow down. The intensification of inflationary
pressures is on account of both domestic and external factors. Excessive government
borrowing from the Central Bank to finance huge budget deficits, power breakdown
restricting the supply side along with the sharp spike in global commodity prices is major
contributors in fuelling the inflation rate in Pakistan after the mid 2000s.
The tax-to-GDP ratio showed no signs of improvement over the 2000-2010 period and
on average it even decreased from almost 13 percent of GDP during the 1990s
period to 10 percent of GDP during 2000-2010. The low tax to GDP ratio in spite of
introducing tax reforms highlighted the importance of correcting the structural
impediments in the economy, along with real implementation of reforms without any
political pressure/consideration. Besides this, a match between sources of growth in
the economy and tax revenue base needs to be considered.
0
2
4
6
8
10
12
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Tax Revenue (as % of GDP)
Tax Revenue (as % of GDP)
9. Financial Sector Performance and Conceptual Framework
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8. Current Structure of the Financial Sector:
Different measures under the financial liberalization regime adopted in Pakistan
and subsequent developments thereafter have altered the financial structure of the
economy. Today, the financial sector of Pakistan consists of different entities involved in
the transactions of financial instruments in money, capital and foreign exchange market.
These functions in the financial market are performed by a number of financial
institutions like specialized banks, commercial banks, development finance institutions,
national savings schemes, insurance companies, stock exchanges etc.
The banking sector in Pakistan has been transformed significantly since the introduction
of reforms in 1990s. From a state domination of the banking industry in the early 1990s,
the private sector participation has increased remarkably during the recent years. Today
the banking sector in Pakistan includes 36 commercial banks (including 4 public sectors
commercial banks, 25 local private banks, and 7 foreign banks) and 4 specialized banks.
Branches (No)
0
2000
4000
6000
8000
1748
7498
55 546
Branches (No)
Branches (No)
11. Financial Sector Performance and Conceptual Framework
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The competition in the banking sector in Pakistan has no doubt increased on account of
privatization in the banking industry. However, if we look at the market share
(concentration) of few large banks in Pakistan it’s still high. The share of the top five
banks has reduced to 50.8 percent in 2009 as compared to 63.2 percent in year 2000. The
share of top 10 banks has only marginally reduced from 76.5 percent to 73 percent. While
the share of the smallest five banks despite of increasing has declined further to 0.5
percent in 2010 from 0.7 percent in 2000.
9. Summary:
Financial reforms have successfully transformed the financial structure of the economy.
The state ownership of the banking industry in terms of assets, advances,
investment etc has decreased significantly from its 1990 level. Today private banks
own more than 70 percent of the banking assets. Financial sector work under the
mechanisms of market based monetary policy, market determined interest and
exchange rates, full current account convertibility with partial capital account
0
10
20
30
40
50
60
70
80
90
14.6
81.7
2.8
0.9
Investment (as %)
Investment (as %)
12. Financial Sector Performance and Conceptual Framework
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liberalization, and development in securities market. The foreign exchange regime is
more liberalized and working under floating exchange rate regime since July 2000.
Exchange rate is not tampered by SBP and work under market based price mechanism.
Current account is fully convertible while capital account is partially liberalized.
10.Empirical evidence from research work “The Impact of
Inflation on Financial Sector Performance” by Boyd et al
(2001):
A growing theoretical literature describes methods whereby even predictable increases in
the rate of inflation interfere with the ability of the financial sector to allocate resources
effectively.
In some cases, once the rate of inflation exceeds the critical level, perfect insight into the
forces that produces change do not allow an economy to meet to a steady state displaying
either an active financial system or a high level of real activity.
Thus, the theoretical literature on credit market frictions, finance, and growth delivers
empirically testable implications regarding the consequences of higher long-run or
permanent rates of inflation. Methodologically, we also examine potential non-linearities
in the data and we consider alternative theories regarding the relationship between
inflation and financial sector performance.
Quantitative technique that has been used here is dynamic-panel GMM estimator to
control for potential biases induced by country-specific effects and endogeneity. Data for
the research are two datasets based on longitudinal availability. The “banking data set”
13. Financial Sector Performance and Conceptual Framework
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focuses on measures of banking development. It covers the period 1960–1995. There is a
maximum of 97 countries, though most of the analysis focuses on 65 countries.
10.1. Data and Summary Statistics:
The “banking data set” focuses on measures of banking development. It covers the
period 1960–1995. There is a maximum of 97 countries, though most of the analysis
focuses on 65 countries.
LIQUID LIABILITIES is the ratio of liquid liabilities of the financial sector (currency
plus demand and interest-bearing liabilities of banks and non-bank financial
intermediaries) to GDP.
An alternative measure is BANK ASSETS, which is the ratio of total assets of “deposit
money banks” (commercial banks and other deposit taking banks) divided by GDP.
For inflation we computed the measure of average inflation from the CPI data. Finally,
our preferred financial intermediary development measure is PRIVATE CREDIT. This
measure equals banking institution credits to the private sector as a percent of GDP.
10.2. Results:
At low-to-moderate rates of inflation, there is a strong negative association between
inflation and (a) lending by the financial sector to the private sector, (b) the quantity
of bank assets, and (c) the volume of liabilities issued by banks.
At low-to-moderate rates of inflation, there is a pronounced inverse relationship
between inflation and measures of stock market liquidity and trading volume. There
is a robust positive relationship between inflation and stock return volatility.
14. Financial Sector Performance and Conceptual Framework
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The data strongly support the presence of a nonlinear relationship between inflation
and financial sector performance, perhaps driven by threshold rates of inflation. As
inflation rises, financial sector performance falls, but the marginal impact of
additional inflation on the financial sector also diminishes rapidly. Thus, for
Example, we find that once the average rate of inflation exceeds 15 percent per year,
financial sector performance drops sharply, but at the same time, the partial
correlation between inflation and measures of intermediary or equity market activity
essentially disappears.
The data support the presence of a nonlinear relationship between inflation and
nominal equity returns. Again, this non-linearity may be driven by threshold rates of
inflation. For example, we find that for economies with average rates of inflation
below 15 percent per year, nominal equity returns are approximately uncorrelated
with inflation. For economies with inflation rates above this threshold, however,
inflation and nominal equity returns vary essentially one-for-one.
Based on pure cross-sectional regressions, this paper’s findings are consistent with
models that emphasize that predictable inflation can exacerbate informational frictions
and impede financial sector performance with negative repercussions for economic
activity. Since past work demonstrates that the functioning of banks and equity markets
can materially affect long-run economic growth, this paper focuses only on the
relationship between sustained inflation and the functioning of banks and equity markets.
Thus, its main contribution is to elucidate the impact of sustained inflation rates on
financial sector performance. To assess the confidence with which we can make this
causal statement, we augment our cross-sectional investigation with an alternative
estimation strategy.
15. Financial Sector Performance and Conceptual Framework
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10.3. Conclusion:
The evidence indicates that there is a significant, and economically important, negative
relationship between inflation and financial development. This correlation emerges
essentially independently of the time period considered, the empirical procedure
employed, or the set of variables that appear in the conditioning information set. It is also
not sensitive to inclusion or exclusion of countries that have experienced extraordinarily
high rates of inflation. Finally, the negative relationship between inflation and financial
sector performance emerges even after controlling for simultaneity and omitted variable
biases. Thus, a preponderance of evidence indicates that sustained inflation and financial
sector performance display a strongly negative association. Moreover, we have found that
the empirical relationship between inflation and financial sector activity is highly
nonlinear.
16. Financial Sector Performance and Conceptual Framework
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11.References:
Vittas, D., 1992, “Introduction and Overview” in D. Vittas (eds.) Financial Regulations:
Changing the Rule of the Game, Washington, and D.C: EDI Development
Studies, World Bank.
Boyd, J. H., Levine, R., & Smith, B. D. (2001). The impact of inflation on financial
sector performance. Journal of monetary Economics, 47(2), 221-248.
SBP Handbook (2010), SBP Research Bulletins (various issues), and IFS (2010)
SBP “Economic Overview 2010"
Statistics and Data ware House Department SBP (2012)
http://globaledge.msu.edu/industries/financial-services/background
http://www2.deloitte.com/us/en/pages/outlooks/industry-outlooks.html
http://www.kpmg.com/us/en/industry/pages/default.aspx
http://www.pwc.com/gx/en/industries.html
http://www.ey.com/US/en/Industries
http://www.investopedia.com/terms/f/financial_sector.asp
http://www2.econ.iastate.edu/tesfatsi/finintro.htm