Most banks around the world delay provisioning for bad Economic Slowdowns loans until it is too latewhen cyclical downturns Too Much, Too Late? have already set in. The size and timing of loan loss provisions tend to improve

Beck, Lundberg, and Majnoni extend the recent The authors test these predictions in a pane I data set literature on the link between financial development and covering 63 countries over the period 1960-97, using economic volatility by focusing on the channels through the volatility of terms of trade to proxy for real volatility, which the development of financial intermediaries affects and the volatility of inflation to proxy for motetary economic volatility. Their theoretical model predicts that volatility. They find no robust relationship between the well-developed financial intermediaries dampen the development of financial intermediaries and growth effect of real sector shocks on the volatility of growth volatility, weak evidence that financial intermediaries while magnifying the effect of monetary shocks-dampen the effect of terms of trade volatility, and suggesting that, overall, financial intermediaries have no evidence that financial intermediaries magnify the impact unambiguous effect on growth volatility. of inflation volatility in low-and middle-incom]e countries. This paper-a product of Finance, Development Research Group-is part of a larger effort in the group to un,derstand the links between the financial system and economic growth. Copies of the paper are available free from the World Bank, 18 18

We investigate the effect of judicial efficiency on banks' lending spreads for a large cross section of countries. We measure bank interest rate spreads for 106 countries at an aggregate level and for 32 countries at the level of individual banks. We find that, after controlling for a number of other country characteristics, judicial efficiency, in addition to inflation, is the main driver of interest rate spreads across countries. This suggests that in addition to improving the overall macroeconomic climate in a country, judicial reforms, through a better enforcement of legal contracts, are critical to lowering the cost of financial intermediation for households and firms.

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