Gregorio Impavido, Alberto R. Musalem, and Thierry Tressel institutions might affect the efficiency and stability of the banking system. Second, using bank level data across countries we provide regression analysis on panel data in order to assess the impact on contractual savings on bank efficiency and lending behavior. We concentrate on profitability measures and on term transformation and credit risks indicators.

# I **INTERACTION BETWEEN CONTRACTUAL SAVINGS INSTITUTIONS AND BANKS**

In this section, we discuss the potential mechanisms through which the development of contractual savings institutions might affect the banking system. We want to address two main questions. First, does the development of contractual savings institutions increase or decrease the competitive pressures on banks? In other words, are banks and contractual savings institutions substitute or complementary? Second, does the development of contractual savings institutions enhance the stability of the banking system?

The broad movement of financial liberalization that started in the early eighties has deeply modified the functioning of banking systems in many countries. Increased competitive pressures may increase efficiency of the banking system, but may also increase instability when proper regulation and supervision is not set. Surprisingly, few studies have analyzed the efficiency, profitability and balance sheets of banks on a crosscountry basis<sup>1</sup> . In particular, whereas financial liberalization was often associated to competitive pressures from non-bank financial institutions, there has been, to date, no attempt to analyze both empirically and theoretically the interaction between the banking system and other financial institutions (except the stock market)<sup>2</sup> .

First, we want to assess whether the development of contractual savings institutions has increased the competitive pressures on the banking system, and more particularly how the behavior of banks has been affected, across countries and over time. In doing so, we want to assess the specific impact of contractual savings, after controlling for banks' characteristics, financial sector development, and the macroeconomic environment.

Contractual savings institutions will act as competing suppliers of funds, hence competitive pressure on the banking systems will increase, either indirectly or directly. Contractual savings institutions will indirectly increase competitive pressures because the development of contractual savings institutions is associated to the development and increased liquidity of the capital markets (Impavido and Musalem (2000)). The cost of issuing securities will decrease<sup>3</sup> , hence reducing the market power of banks<sup>4</sup> . Moreover, contractual savings institutions may increase the supply of public information on capital market and have positive spillover effects on the monitoring of borrowers by banks. In

> 1 See, however, Demirguc-Kunt and Huizinga (1999a, 1999b), Davis and Tuori (2001) and Claessens, Demirguc-Kunt and Huizinga (2001).

> 2 Allen and Santomero (1999) claim that the broad movement towards more market finance, that was initiated in the 80s, has led to a greater importance of non-bank financial intermediation.

> Underwriting costs may decrease, as argued by Vittas (i 999) and the supply of funds will increase on capital markets.

4See Rajan (1992) who analyzes the welfare gains of increasing firms' outside financial opportunities. See also Petersen and Rajan (1995).

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