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The crisis as a wake-up call: do banks tighten screening and monitoring during a financial crisis?

  • Ralph de Haas

    (EBRD)

  • Neeltje van Horen

    (Dutch Central Bank.)

Recent developments and theoretical work on the transition economies has emphasised the importance of internal bargaining and incentives. This paper constitutes the first attempt to systematise the large and growing body of case studies of enterprise restructuring in Poland, Hungary, Slovakia, Russia and the Czech Republic. We begin from a framework in which the incentives and constraints on managers are crucial for the success of transforming enterprises into value maximising firms. The forms of, and the constraints on, active behaviour are examined for each enterprise across the dimensions of internal organisation, product and labour markets and investment. There is a huge variety in the quality of the evidence and in the experiences documented. Although we find widespread evidence of enterprise managers reacting to the post-reform environment, examples of deep restructuring are rare. Managers are hamstrung by weak incentives and increasing employee opposition, as well as by the uneven development of social and market infrastructure external to the enterprise. Low incentives arise from the absence of a managerial labour market, monopoly power and the large component of idiosyncratic knowledge possessed by incumbents. Opposition is based on the high costs of job loss. A characteristic feature of the transition economies is the ability of employees to veto restructuring and the opposition of labour appears likely to increase as unemployment rates and durations grow. Cases are described where the passage of restructuring measures has been facilitated by the willingness of the state to provide compensation to the ‘losers’. The examination of pre-privatisation behaviour suggests that the pace and depth of restructuring would increase after privatisation only when privatisation clearly transforms the incentives and constraints facing managers. The limited evidence on post- privatisation restructuring surveyed here suggests that foreign ownership of a former state-owned enterprise is the exception in which privatisation produces a marked change in behaviour. The role of product market power runs through the survey. Some enterprises use profits as a shield to avoid painful change, others have actively sought to build dominant positions. Aggregate data is presented which raises the possibility that the pattern of restructuring is being distorted by the uneven distribution of monopoly power across sectors. In our conclusions, we suggest ways in which future enterprise-level research could be improved to shed more light on the pattern of restructuring and to facilitate safer policy advice. From a policy perspective, we stress the complementarity between different reforms. The focus on the incentives and constraints facing enterprise managers highlights the limitations to a strategy which relies on privatisation to raise efficiency. The state must play a role in facilitating labour shedding and internal reorganisation of enterprises through providing finance for compensation, promoting the provision of social services outside the structure of enterprises and fostering the creation of new jobs. The hardening ahs promoted adjustment but over-tight budgetary policies may offset this, slowing the arte of new job creation ad heightening uncertainty about the prospects of enterprises under restructuring.

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Paper provided by European Bank for Reconstruction and Development, Office of the Chief Economist in its series Working Papers with number 117.

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Length: 31 pages
Date of creation: Aug 2010
Date of revision:
Handle: RePEc:ebd:wpaper:117
Contact details of provider: Postal: One Exchange Square, London EC2A 2JN
Web page: http://www.ebrd.com/pages/research/publications/workingpapers.shtml

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  1. Viral V. Acharya & Iftekhar Hasan & Anthony Saunders, 2006. "Should Banks Be Diversified? Evidence from Individual Bank Loan Portfolios," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1355-1412, May.
  2. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
  3. Steven Ongena, 1999. "Lending Relationships, Bank Default and Economic Activity," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 6(2), pages 257-280.
  4. Poonam Gupta & Asli Demirgüç-Kunt & Enrica Detragiache, 2000. "Inside the Crisis; An Empirical Analysis of Banking Systems in Distress," IMF Working Papers 00/156, International Monetary Fund.
  5. Berger, Allen N. & Udell, Gregory F., 2004. "The institutional memory hypothesis and the procyclicality of bank lending behavior," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 458-495, October.
  6. Rajan, Raghuram G, 1994. "Why Bank Credit Policies Fluctuate: A Theory and Some Evidence," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 399-441, May.
  7. Amir Sufi, 2007. "Information Asymmetry and Financing Arrangements: Evidence from Syndicated Loans," Journal of Finance, American Finance Association, vol. 62(2), pages 629-668, 04.
  8. Ralph de Haas & Iman van Lelyveld, 2006. "Internal Capital Markets and Lending by Multinational Bank Subsidiaries," DNB Working Papers 101, Netherlands Central Bank, Research Department.
  9. Katerina Simons, 1993. "Why do banks syndicate loans?," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 45-52.
  10. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  11. Bolton, Patrick & Scharfstein, David S, 1996. "Optimal Debt Structure and the Number of Creditors," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 1-25, February.
  12. Chowdhry, Bhagwan, 1991. "What Is Different about International Lending?," Review of Financial Studies, Society for Financial Studies, vol. 4(1), pages 121-48.
  13. Dell’Ariccia, G. & Igan, D. & Laeven, L., 2009. "Credit Booms and Lending Standards : Evidence from the Subprime Mortgage Market," Discussion Paper 2009-46 S, Tilburg University, Center for Economic Research.
  14. Christophe J. Godlewski, 2008. "What Drives the Arrangement Timetable of Bank Loan Syndication ?," Working Papers of LaRGE Research Center 2008-02, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
  15. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August.
  16. Allen, Franklin, 1990. "The market for information and the origin of financial intermediation," Journal of Financial Intermediation, Elsevier, vol. 1(1), pages 3-30, March.
  17. Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-400, September.
  18. Jonathan D. Jones & William W. Lang & Peter J. Nigro, 2005. "Agent Bank Behavior In Bank Loan Syndications," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 28(3), pages 385-402.
  19. Dennis, Steven A. & Mullineaux, Donald J., 2000. "Syndicated Loans," Journal of Financial Intermediation, Elsevier, vol. 9(4), pages 404-426, October.
  20. Broecker, Thorsten, 1990. "Credit-Worthiness Tests and Interbank Competition," Econometrica, Econometric Society, vol. 58(2), pages 429-52, March.
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