Working Paper: CEPR ID: DP3794
Authors: Haizhou Huang; Dalia Marin; Chenggang Xu
Abstract: This Paper explains both the onset of the financial crisis in 1998 and the striking economic recovery afterwards in Russia and other Former Soviet Union (FSU) economies. Before the crisis banks do not lend to the real sector of the economy, and firms use non-bank finance - including trade credits and barter trade - to finance production. The banking failure arises due to the coexistence of adverse selection in a lemons credit market jointly with high government borrowing. The collapse of the treasury bills market in the financial crisis of August 1998 triggers a change in banks' lending behaviour. As a result output recovers which provides initial conditions for banking development.
Keywords: banking development; institutional trap; nonbanking finance
JEL Codes: D82; G21; G30; O16; P34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial crisis of 1998 (F65) | banks shift focus to lending to the real sector (G21) |
| Financial crisis of 1998 (F65) | improved average creditworthiness of borrowers (G51) |
| improved average creditworthiness of borrowers (G51) | lower interest rates (E43) |
| lower interest rates (E43) | more firms switch from nonbank finance to bank loans (G21) |
| Financial crisis of 1998 (F65) | decline in barter and noncash payments (E42) |
| decline in barter and noncash payments (E42) | increase in bank lending (G21) |
| Financial crisis of 1998 (F65) | economic recovery in Russia and Ukraine (P29) |
| lower interest rates (E43) | better quality firms attracted back to banking sector (G21) |
| better quality firms attracted back to banking sector (G21) | improved overall economic conditions (F69) |