Moving Money analyses the influence of politics on financial systems. Daniel Verdier examines how information asymmetry and economies of scale over time have created a redistributional conflict between large and small banks, financial centres and their peripheries, and he discusses how governments have attempted to arbitrate this conflict. He argues that centralized states have tended to create concentrated, internationalized, market-based and specialized financial systems, whereas decentralized states have favoured dispersed, national, bank-based and, with a few exceptions, universal systems. Verdier then sets out to uncover the sources, political and economic, of cross-country variation in financial market organization, examining 15 to 20 OECD countries from 1850 onwards
Over the years there has been an increase in the number of bank failures in both centralized and decentralized economies (Saunders, 1994; Williams, 1995; The Economist, 1992; European Bank of Reconstruction, 1993). Internal reasons given for the bank failures include reckless lending, corruption, non-use of prudent classification risk assessment methods, fraud and management deficiencies. External factors such as deregulation; lack of information among bank customers; homogeneity of the banking business, connections among banks do cause bank failure. For centrally planned economies government and political interference in the banking operations and policies also contribute to bank failure. Tanzania, which until recently was characterized by a centrally planned economy, and the government having majority (51%) share holding in parastatals and banks also experienced bank failure in form of non-performing assets (NPAs). In Tanzania, bank policies reflected government directives and policies as well as political motives. Due to the dual government ownership of the bank and the parastatals, bank lending policies, procedures and regulations favored parastatal firms and agricultural marketing boards. For example, at the end of 1998, out of 78% NBC loan portfolio the majority went to parastatals and cooperative unions, with only 3% going to private firms. The majority of parastatals and cooperative unions were frequent loss makers and financially distressed. For continued existence they had to depend on the government subvention, which proved to be a heavy burden to the government. As a result, when the parastatals were experiencing financial difficulties and unable to pay the bank loans, the government solved the problem by directing the National bank of Commerce (NBC), the only commercial bank, to offer loans to the troubled parastatals and cooperative unions. By 1991, due to increased lending to financial distressed parastatals and cooperative unions, the NBC suffered large non-performing loans (NPAs) equal to 70% of the total bank NPAs. Considering the high rate of NPAs suffered by NBC, this paper has tried to show that government and political interventions and the non-use of prudent credit scoring methods had contributed to the NBC failure. African Journal of Finance and Management Vol.9(1) 2000: 14-30
In any economic environment where decisions are decentralized, agents consider the risk that others might unfairly exploit informational asymmetries to their own disadvantage. Incomplete results, especially, lies at the heart of financial transactions in which agents trade real claims for promises of future real claims. Agents thus need to invest considerable resources to assess the trustworthiness of others with whom they know they can interact only under conditions of limited and asymmetrically distributed information. Thinking of finance as the complex of institutions and instruments needed to reduce the cost of trading promises among anonymous individuals who do not fully trust each other, the author analyzes how incomplete trust shapes the transaction costs in trading assets, and how it affects resource allocation and pricing decisions from rational, forward-looking agents. His analysis leads to core propositions about the role of finance and financial efficiency in economic development. He recommends areas of financial sector reform in emerging economies aimed at improving the financial system's efficiency in dealing with incomplete trust. Among other things, the public sector can improve trust in finance by improving financial infrastructure, including legal systems, financial regulation, and security in payment and trading systems. But fundamental improvements in financial efficiency may best be gained by eliciting good conduct through market forces.
The current economic problems in Southeast Asia can be attributed not to too much reliance on financial markets, but to too little . Like the U.S. economy a century ago, the emerging Asian economies do not have welldeveloped capital markets and so remain heavily dependent on their banking systems to finance growth. For all its benefits, banking is “not only basically 19th‐century technology, but disaster‐prone technology.” The extreme maturity (and, in some cases, currency) mismatch on banks' balance sheets plus the first‐come, first‐served nature of the deposit obligations mean that banks are inherently vulnerable to massive runs by depositors—and that their economies are subjected to periodic credit crunches. And, as the author says, “in the summer of 1997 a banking‐driven disaster struck in East Asia, just as it had struck so many times before in U.S. history.” In this century, In this century, the U.S. economy has steadily reduced its dependence on banks by developing “dispersed and decentralized” financial markets. In so doing, it has increased the efficiency of the U.S. capital allocation process and reduced its susceptibility to the credit crunches that have occurred throughout U.S. history. By contrast, Japan has not reduced its economy's dependence on banks, and its efforts to deal with its banking problems have served only to destabilize itself as well as its neighbors. Developing countries in Southeast Asia and elsewhere are urged not to follow the Japanese example, but to take measures aimed at developing financial markets and institutions that will either substitute for or complement bank products and services.