Creditor Protection and Credit Volatility Arturo Galindo and Alejandro Micco Comments by Brian Pinto Barcelona March 2006

Sorry I could not make it to Barcelona Fell victim to ‘flu volatility

Structure 1.Comments on model 2.Comments on empirical implementation 3.Policy issues Most of my comments are on 2.

Model Model of bank behavior: –How would this change with: State-owned banks Insider lending These are issues in many developing countries –Could lead to increase in credit as a result of defensive lending/political pressure during negative shocks, eventual bailouts

Empirical Implementation-1 Time period is: –Short –Dominated by transition, E Asian, Russian, Argentine crises –Oil boom beginning in 2001 Appendix 2 table 3 shows transition economies, oil exporters, E Asian crisis countries and conflict countries exhibit by far the highest credit volatility Authors need to comment on how this affects ability to generalize results

Empirical Implementation-2 Exogenous shock variable (p 15) –Most Nigerian exports (oil) to US and EU. So Nigeria would be shown to have positive shocks even though oil prices and the Nigerian economy were in the doldrums much of this period! –Is this variable biased towards a positive value (unlike, say, TOT shocks)? –Why not show it in App 2 table 3? –P 16 para 1 refers to real credit growth, App 1 to real GDP growth, pl reconcile

Empirical Implementation-3 Real credit growth –Range is huge to Are outliers driving results? –Why is credit growth and not volatility the dependent variable in the regressions? –Might also be useful to split volatility into normal and abnormal components (Norman knows about this) Creditor Rights variable: letter vs spirit of law: Nigeria, Zimbabwe both get a 4.0!

Policy implications How do countries strengthen financial institutions? Permissive macro policy and soft budgets for firms means law pales into insignificance, right?? Would round out the paper nicely to have some country anecdotes.

Thank you I enjoyed reading this paper Hope these comments useful Thanks to the authors