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Conceptual Framework, Stylized Facts, and the Role of the Government

KEY MESSAGES

• Long-term finance¡ªdefined here as any source of funding with maturity exceeding at least one year¡ªcan contribute to economic growth and shared prosperity in multiple ways. Longterm finance reduces firms¡¯ exposure to rollover risks, enabling them to undertake longerterm fixed investments, contributing to economic growth and welfare. Access to long-term financial instruments allows households to smooth income over their life cycle¡ªby investing in housing or education, for example¡ªand to benefit from higher long-term returns on their savings.
•  Firm and household data show limited use of long-term finance in developing countries, particularly among poorer households and smaller firms. As financial systems develop, the maturity of external finance lengthens. Banks are the main providers of long-term finance and the share of their lending that is long term increases with countries¡¯ income. As countries¡¯ income grows, economies have more developed capital markets and institutional investors that can support long-term finance.
• The use of long-term finance reflects both the demand for and supply of contracts with longterm maturities and reveals the allocation of risk between users and providers. Greater use of long-term finance implies that lenders are exposed to greater risk relative to borrowers. Optimal risk sharing between borrowers and lenders may lead to different equilibrium levels of use of long-term finance for different borrowers and lenders, and in different countries and at different points in time.
• Governments have a role to play in promoting long-term finance when it is undersupplied because of market failures and policy distortions. The government can promote long-term finance without introducing distortions by pursuing policies that foster macroeconomic stability, low inflation, and viable investment opportunities; promoting a contestable banking system with healthy entry and exit and supported with strong regulation and supervision; putting in place a legal and contractual environment that adequately protects the rights of creditors and borrowers; fostering financial infrastructures that limit information asymmetries; and promoting the development of capital markets and institutional investors. In contrast, efforts to promote long-term finance through directed credit, subsidies, and government-owned banks have not been successful in general because of political capture and poor corporate governance practices.

REALATED LINKS

• Badev, Anton, Thorsten Beck, Ligia Vado, and Simon Walley. 2014. ¡°¡± Policy Research Working Paper 6756, World Bank, Washington, DC.
• Calder¨®n, Cesar, Enrique Moral-Benito, and Luis Serv¨¦n. 2015. ¡°¡±&²Ô²ú²õ±è;Journal of Applied Econometrics 30 (2): 177¨C98.
• de la Torre, Augusto, Alain Ize, and Sergio L. Schmukler. 2012. ¡°Financial Development in Latin America and the Caribbean: The Road Ahead.¡± World Bank, Washington, DC.
• Demirg¨¹?-Kunt, Asl?, Mar¨ªa Soledad Mart¨ªnez Per¨ªa, and Thierry Tressel. 2015a. ¡°Determinants of Corporate Capital Structures.¡± World Bank, Washington, DC.
• ¡ª¡ª¡ª. 2015b. ¡°The Impact of the Global Financial Crisis on Firms¡¯ Capital Structures: The Role of Financial Markets and Institutions.¡± World Bank, Washington, DC.
• Opazo, Luis, Claudio Raddatz, and Sergio Schmukler. 2015. ¡°¡±&²Ô²ú²õ±è;World Bank Economic Review 29 (2).