1、Published in The Role of Government in East Asian Economic DevelopmentComparative Institutional Analysis, M. Aoki, H-K. Kim then 3b shows the rents that can accrue to banks.The equilibrium lending rate will now be rLand the difference (rL-rd) defines the economicrent accruing to banks. In this scena
2、rio, the lending rate is greater than it would be in theabsence of intervention and so banks capture rents both from households (r0- rd) and fromfirms (rL- r0).A simple graphical way of describing the efficiency gains from rent creation is an outwardshift in the supply curve. Consider our model wher
3、ein the “rent effect“ (i.e. the increasedsavings due to greater deposit security and/or increased investments in improving the depositinfrastructure and facilitating access to the formal financial sector) on savings is large. If therent effect is large relative to the interest-elasticity of savings,
4、 then it is possible that the totalvolume of funds intermediated through the formal financial sector is larger than would beavailable under “free markets.“ See Figure 3c. Now the “excess“ demand for loans gives anequilibrium lending rate of rLand banks capture rents of rL- rd. Interestingly, despite
5、 the rentcapture by banks, firms are better off under financial restraint with the rent effect. Theyobtain a greater volume of loans at lower rate of interest than they would under the Walrasianequilibrium (QdQ0and rL r0). We can find plausible parameters so that households are alsoin a more favorab
6、le situation under financial restraint because the rent effect, i.e. the greatersecurity and the improved deposit infrastructure, dominates the interest rate effect (cf.Hellmann, Murdock and Stiglitz 1994a).Section I.3: Lending Rate Control and Rent AllocationReturning to the framework of Figure 3b,
7、 where the rent effect is assumed away, we canstudy the effect of a concurrent restriction on the lending rate. Assume that the governmentintervenes to determine both the deposit rate, rd, and the lending rate, rL. Rents clearly stillaccrue to banks (rL- rd), and they also accrue to firms if the fia
8、t lending rate is less than theWalrasian interest rate (rLr0). See Figure 3d. Moreover, if we allow for a sufficiently large6As with the rest of our discussion, we only consider the distribution of rents within the private sector.Our fundamental assumption is that the government captures no rents fr
9、om the financial sector. If thisassumption is relaxed, then the regime may no longer be appropriately characterized as financial restraint, butrather takes on characteristics of financial repression.10rent effect such that the volume of savings is greater under financial restraint, there is noambigu
10、ity - banks capture rents (rL- rd) and so do firms (r0- rL). See Figure 3c.In this simplified demand-supply framework, the allocation of rents is simply a function ofthe fiat deposit and lending rates. In Section IV we will further refine the analysis of thedistribution of rents by considering how l
11、ending rate controls effect the market equilibriumunder credit rationing with multiple classes of borrowers.Section I.4: The Role of RentsIt is important to distinguish the nature of rents that we are considering in this analysis. Theinstitutional arrangements that are responsible for how rents are
12、created and captured have animportant influence on their ultimate efficacy in promoting financial deepening. Inparticular, we need to distinguish between rent transfers and rent opportunities.Rent transfers alter the distribution of income without directly altering the incentives of theparties compe
13、ting for these transfers. Worse, agents may prefer to engage in influenceactivities aimed at garnering a disproportionate share of the rents rather than makingproductive investments. Rent opportunities, conversely, are contingent on the agents action.If the rent opportunities provide an increased re
14、turn to activities that are underprovided in acompetitive equilibrium, then these rent opportunities are welfare enhancing. The policyobjective of creating rent opportunities is then to provide appropriate incentives that caninduce a market-based outcome to provide socially beneficial activities.In
15、the case of financial intermediaries, rent opportunities would include incentives to promotedeposit mobilization - both in the breadth and intensity of financial services - and toencourage efficient portfolio allocation and loan monitoring on the part of banks. In theabsence of rent opportunities, h
16、owever, private incentives may be too weak to provide thesocially efficient level of financial services. Banks do not capture the full benefit of theirservices - depositors achieve a higher, less volatile return than available through self-intermediation, and firms benefit from additional access to
17、financing.7We will demonstrate7In a perfectly competitive environment, with perfect information, the benefits of these improvementswould be fully reflected in the prices banks could charge. In the actual market environment, especiallycharacteristic of less developed countries, neither assumption is
18、plausible. More generally, the need forfinancial intermediation arises out of imperfect information and transaction costs, in the presence of whichmarkets are almost never Pareto efficient (cf. Greenwald and Stiglitz (1986).11in this paper how financial restraint creates the rent opportunities for b
19、anks that facilitatethese goals.Section I.5: The Optimal Level of Financial RestraintTraditional welfare analysis emphasizes the “Harberger“ triangle, as depicted in Figure 3b. Itshould be noted that if financial savings are not very elastic, the welfare triangle is small. Weargue that the welfare l
20、oss has to be traded-off against the benefits of financial restraint. Ifthere are agency costs or market failures, creating rents has direct benefits (by reducing thecost of intermediation) that can well outweigh the welfare loss. These welfare gains fromrent creation can be depicted as an outward s
21、hift in the supply curve. What is important tonote about this trade-off is that it suggest that a little financial restraint is good, but that asfinancial restraint becomes more severe, costs may outweigh the benefits. The welfare losstriangle increases monotonically for lower fiat deposit rates, wh
22、ile the benefits of rentcreation may exhibit diminishing returns. Moreover, because of substitution into real assets,the elasticity of savings is likely to increase near zero real rates of returns (cf. section II.2.b).This will significantly increase the welfare loss triangle. As a consequence we ar
23、gue thatwhile real rates of interest should be below the market clearing rate, they should also remainpositive.8Section II: Rents to Financial IntermediariesWe emphasize two important roles of the creation of economic rents for financialintermediaries under a regime of financial restraint. First, by
24、 creating an ongoing flow ofprofits from the continuing operation of the bank, these rents create incentives for banks tooperate as a long run agent (by creating a “franchise value“ for the bank) so that they willwork to monitor effectively firms and manage the risk of their portfolio of loans.Conse
25、quently, banks have incentives to insure that loans are allocated to their most efficientuses (cf. Bhattacharya 1982) and to monitor firms use of those funds. Second, by increasingthe returns to intermediation, banks have strong incentives to increase their own deposit base.Banks will thus make inve
26、stments to attract incremental deposits, for example, by openingnew branches in previously unserved rural areas or by making other investments to bring new8Again, we emphasize the importance of low and stable inflation rates. When inflation is high anderratic, it is almost impossible to maintain pos
27、itive deposit rates.12depositors to the formal financial system. Interestingly, the nature of rents necessary toprovide these incentives are very different for these two effects. It is the average rent on thebanks entire portfolio that creates franchise value for the bank. Conversely, it is the marg
28、inalrent on incremental loans that induce banks to seek out additional deposits.In this section we explain how financial restraint affect financial intermediation. In sectionII.1 we discuss the principal effects of deposit rate controls: “franchise value creation” andincentives for deposit collectio
29、n. We also discuss a related policy of maturity transformation.In section II.2 we discuss how two further policies, restrictions on competition and limitingasset substitution, are complementary policies to financial restraint.Section II.1.a: Average Rents Create “Franchise Value“ for BanksOne of the
30、 major problems of competitive financial systems is their lack of stability. Risk-averse households will only deposit their wealth with financial intermediaries if they have ahigh level of confidence that their funds will remain safe and that they can withdraw theirfunds at will. Also, firms require
31、 a constant presence of banks to finance their ongoingworking capital expenses. As firms and banks continue to transact with each other theydevelop relation specific capital that reduces agency costs of intermediation. Consequently,both improving the stability of the financial sector and creating in
32、centives to develop higherquality financial institutions are important goals for the government of a developing country.Yet financial stability is not easily acquired. Recent discussions of financial instability, suchas the Swhile the costs of capital requirements are that banks are forced to hold a
33、 portfolio ofgovernment securities that typically yield lower returns than a private market lendingportfolio.14This lower rate of return on government bonds implies that the growth of thebanking sector will be relatively slower than under deposit rate controls, where banks canaccumulate equity faste
34、r. Also, less funds will be available to private loan markets, whichcan be particularly costly in developing countries, where private lending activity needs to bedeveloped, rather than restricted.15Finally, we argue that deposit rate controls are mucheasier to monitor. Capital requirement are based
35、on accounting measures of the banks networth, which are intrinsically hard to measure, and thus susceptible to manipulation . Bankson the other hand dont want to circumvent deposit rate controls, unless they can attractsubstantial new deposits. But in order to attract new deposits, the banks intenti
36、on of payinghigher deposit rates must become public knowledge, in which case regulators are likely toobtain this knowledge too.16Moreover, governments may be tempted to augment the incentives of banks to refrain frommoral hazard. The government can enforce hefty punishments to failing banks.17It is
37、oftenargued that one of the problems is that the government is unable commit to not rescue failingbanks. While the government may not be able to commit not to rescue the bank, it may wellbe able to punish management.14Interestingly, there are strong parallels between capital requirements and directe
38、d credits. In both casesthe government directs the banks portfolio composition.15Another result derived in that paper is that the incentives to collect deposits, as discussed in the nextsection, will be higher under deposit rate controls than under capital requirements. The intuition is that thebank
39、s margins are always higher under deposit rate control.16Bank may also want to circumvent the deposit rate control to individual large clients, in order to retaintheir business. In these cases, circumvention of the controls may be harder to detect, but would also be on asmaller scale.17An extreme ex
40、ample is Taiwan, where bank managers could be held personally liable for the loans theymade.15An interesting point to note is that financial restraint does not rely on the existence orabsence of deposit insurance. Many analyses of financial market failures, such as theproblems of looting and gamblin
41、g on resurrection , suggest that they occur because depositorsdo not act as an effective monitor because their funds are insured. Looting and gambling onresurrection, however, can occur even in an environment without deposit insurance, wheredepositors are aware of the risk but do not take action eit
42、her because the probability of itoccurring is sufficiently small or the cost of effective monitoring is sufficiently large. Thusfinancial restraint may be beneficial even in the absence of deposit insurance. In the morerealistic case of explicit (or implicit) deposit insurance, the moral hazard prob
43、lems of banksbecome stronger and the role of depositors as monitors becomes weaker, so financialrestraint becomes all the more necessary.There is an important distinction between the rents that are created through financial restraintversus direct forms of subsidization. Under financial restraint, a
44、bank may only capture rentsas a consequence of its own effort - by attracting new deposits to loan in rent-generatingsectors and by rigorous monitoring of its portfolio of loans to ensure maximum return on itsinvestment. When direct subsidies are provided to financial intermediaries, perverseincenti
45、ves may arise. For example, if the government rediscounts too many loans to prioritysectors at a subsidized interest rate, the banks incentives to seek out incremental sources ofdeposits may be weakened. The bank may view government rediscount loans as substitutesfor deposits and it may be far easie
46、r to seek out a greater volume of loans from thegovernment than to develop new branches for deposit collection.18Additionally, thegovernment may provide implicit or explicit loan guarantees to these sectors. This willeffectively reduce the banks incentives to monitor the loans it provides to priorit
47、y sectors.By contrast, the franchise value created by financial restraint does not undermine thecommercial profit-maximization orientation of banks.Finally, it should be noted that franchise value should be supported by an appropriateownership and governance structure of the financial institutions.
48、The banks owners musthave a long-term perspective. The flotation of a banks equity on a stock market may be18Note that this argument does not imply that the central bank should never provide cheap rediscountingfacilities. In Section II.3, we discuss how rediscounts may assist banks in providing long
49、 term credit, if they arestructured appropriately. The key point discussed in the current section is that banks must have incentives, onthe margin, to seek out additional deposits.16inappropriate, if investors have short horizons (cf. Stein 1989). Also, the banks shareholdersdemands for dividend payments must be subordinated to the preservation of franchise value.Section II.1.b: Financial Deepening through Deposit CollectionCreating a network of depository institutions to collect savings and making furtherinvestments to integrate depositors into the formal financial sector
