Creditor Protection and Credit Response to Shocks

Creditor Protection and Credit Response to Shocks Arturo Jose Galindo and Alejandro Micco This article studies the relationship between creditor protection and credit responses to macroeconomic shocks. Using a data set on legal determinants of finance in a panel of data on aggregate credit growth fo...

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Main Authors:	Galindo, Arturo José, Alejandro Micco
Format:	Journal Article
Published:	World Bank 2012
Subjects:	credit growth Creditor Creditor Protection creditor rights debtors financial markets legal creditor protection lenders payoffs systemic crises
Online Access:	http://hdl.handle.net/10986/4464

id	okr-10986-4464
recordtype	oai_dc
spelling	okr-10986-44642021-04-23T14:02:18Z Creditor Protection and Credit Response to Shocks Galindo, Arturo José Alejandro Micco credit growth Creditor Creditor Protection creditor rights debtors financial markets legal creditor protection lenders payoffs systemic crises Creditor Protection and Credit Response to Shocks Arturo Jose Galindo and Alejandro Micco This article studies the relationship between creditor protection and credit responses to macroeconomic shocks. Using a data set on legal determinants of finance in a panel of data on aggregate credit growth for 79 countries during 1990 2004, it is shown that credit is more responsive to external shocks in countries with weak legal creditor protection and weak enforcement. The results are statistically and economically significant and robust to alternative measures of creditor protection, to the inclusion of variables that reflect different stages of economic development, to the restriction of the sample to only developing economies, to the controls for systemic crises, to alternative shock measures, and to vector autoregressive specifications. One strand of the literature has shown that an institutional setup that adequately protects creditor rights (CR) can align the incentives of debtors and lenders, increase the expected payoffs of lending, and deepen financial markets. Source: Authors' analysis is based on the data noted in table A-1. Panel a shows how the development of credit markets (as measured by the ratio of credit to the private sector supplied by the financial sector to GDP) is strongly related to a measure of legal protection to creditors: an index of effective creditor rights (ECR) protection that combines legal protection to creditors and their enforcement (higher values indicate stronger protection). Panel data on aggregate credit growth for 79 countries during 1990 2004 support the claim that better legal protections significantly reduce the sensitivity of credit to shocks. Rather than exploring the impact of shocks on output under different scenarios of financial development, it explores the impact of shocks on financial markets, under different institutional setups. Controlling For Systemic Banking Crises And Financial Liberalization Dependent variable: D log(Credit/GDP) (1) External shock External shock* ECR External shock* CL External shock* developed Systemic crisis dummy variable Financial liberalization 1 Financial liberalization 2 Number of observations Number of countries Country-fixed effects Year-fixed effects R-squared Sample 5.656 (1.395)* 0.665 (0.229)* -- 21.035 (1.824) 20.062 (0.016)* -- -- 1.022 79 Yes Yes 0.16 (2) 6.804 (1.663)* -- 23.198 These results are robust to alternative measures of creditor protection, to the inclusion of variables that reflect different stages of economic development, to the restriction of the sample to developing economies, to controlling for systemic crises and financial liberalization, to alternative shock measures, to possible asymmetric responses, and to vector autoregression dynamic specifications. 2012-03-30T07:12:36Z 2012-03-30T07:12:36Z 2007-09-30 Journal Article World Bank Economic Review 1564-698X http://hdl.handle.net/10986/4464 CC BY-NC-ND 3.0 IGO http://creativecommons.org/licenses/by-nc-nd/3.0/igo World Bank World Bank Journal Article Central America Brazil Honduras Guatemala Bolivia China
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
topic	credit growth Creditor Creditor Protection creditor rights debtors financial markets legal creditor protection lenders payoffs systemic crises
spellingShingle	credit growth Creditor Creditor Protection creditor rights debtors financial markets legal creditor protection lenders payoffs systemic crises Galindo, Arturo José Alejandro Micco Creditor Protection and Credit Response to Shocks
geographic_facet	Central America Brazil Honduras Guatemala Bolivia China
description	Creditor Protection and Credit Response to Shocks Arturo Jose Galindo and Alejandro Micco This article studies the relationship between creditor protection and credit responses to macroeconomic shocks. Using a data set on legal determinants of finance in a panel of data on aggregate credit growth for 79 countries during 1990 2004, it is shown that credit is more responsive to external shocks in countries with weak legal creditor protection and weak enforcement. The results are statistically and economically significant and robust to alternative measures of creditor protection, to the inclusion of variables that reflect different stages of economic development, to the restriction of the sample to only developing economies, to the controls for systemic crises, to alternative shock measures, and to vector autoregressive specifications. One strand of the literature has shown that an institutional setup that adequately protects creditor rights (CR) can align the incentives of debtors and lenders, increase the expected payoffs of lending, and deepen financial markets. Source: Authors' analysis is based on the data noted in table A-1. Panel a shows how the development of credit markets (as measured by the ratio of credit to the private sector supplied by the financial sector to GDP) is strongly related to a measure of legal protection to creditors: an index of effective creditor rights (ECR) protection that combines legal protection to creditors and their enforcement (higher values indicate stronger protection). Panel data on aggregate credit growth for 79 countries during 1990 2004 support the claim that better legal protections significantly reduce the sensitivity of credit to shocks. Rather than exploring the impact of shocks on output under different scenarios of financial development, it explores the impact of shocks on financial markets, under different institutional setups. Controlling For Systemic Banking Crises And Financial Liberalization Dependent variable: D log(Credit/GDP) (1) External shock External shock* ECR External shock* CL External shock* developed Systemic crisis dummy variable Financial liberalization 1 Financial liberalization 2 Number of observations Number of countries Country-fixed effects Year-fixed effects R-squared Sample 5.656 (1.395)* 0.665 (0.229)* -- 21.035 (1.824) 20.062 (0.016)* -- -- 1.022 79 Yes Yes 0.16 (2) 6.804 (1.663)* -- 23.198 These results are robust to alternative measures of creditor protection, to the inclusion of variables that reflect different stages of economic development, to the restriction of the sample to developing economies, to controlling for systemic crises and financial liberalization, to alternative shock measures, to possible asymmetric responses, and to vector autoregression dynamic specifications.
format	Journal Article
author	Galindo, Arturo José Alejandro Micco
author_facet	Galindo, Arturo José Alejandro Micco
author_sort	Galindo, Arturo José
title	Creditor Protection and Credit Response to Shocks
title_short	Creditor Protection and Credit Response to Shocks
title_full	Creditor Protection and Credit Response to Shocks
title_fullStr	Creditor Protection and Credit Response to Shocks
title_full_unstemmed	Creditor Protection and Credit Response to Shocks
title_sort	creditor protection and credit response to shocks
publisher	World Bank
publishDate	2012
url	http://hdl.handle.net/10986/4464
_version_	1764391480749719552

Creditor Protection and Credit Response to Shocks

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