Abstract
Baltic region is traditionally treated as similar and comparable when analysed on the macroeconomic level. The major difference is faced when the analysis is performed for the corporate bond market – the weight of Latvian publically traded corporate bonds among the three countries- Latvia, Lithuania and Estonia- reached 94% by the number of issues quoted. With 47 corporate bonds listed in Nasdaq Riga, Latvian corporate bond market demonstrated the rapid growth and recognition of corporate bonds as the source of alternative to bank lending financing method (Nasdaq Baltic, 2017). There are no obvious macro or microeconomic evidence for Latvia meeting more favourable conditions for corporate bond market development than Lithuania and Estonia The increasing role of the capital market as the alternative to the traditional to Europe banking sector is strongly supported by the European Commission (EC). In 2015 the EC announced the Capital Market Union (CMU) initiative and respective action plan as the reaction to the challenges faced by both banking sector and small and medium enterprise (SME) segment in Europe. As integrated and more diverse capital markets will decrease the cost of funding for companies, the objective of the CMU is to make the financial system more resilient in all 28 Member States including Latvia, Lithuania and Estonia (European Commission, 2017). While several steps like proposal to modernise the Prospectus Directive have been made, further actions based on the review of regulatory barriers to SME admission on public markets and SME growth markets and review of European Union corporate bond markets, focusing on how market liquidity can be improved made in 2017 will follow (European Commission, 2015). The aim of this article is to analyse the level of development of the biggest Baltic corporate bond market- Latvian corporate bond segment and to reveal the potential CMU introduction effect. The paper applies Financial Sector Development Indicators (FSDI) framework developed by The World Bank (World Bank, 2004) to the country cluster as defined by Bending et al (2014). The paper relates the results to CMU action plan developed by the European Commission. The article estimates that Latvian corporate bond market is highly developed compared to the peers selected where the only lagging area is size. The article concludes that reviving securitisation, participation in European Long Term Investment Funds and developing European private placement market should be prioritised for Latvia within CMU framework.DOI: http://dx.doi.org/10.5755/j01.eis.0.11.18147
Highlights
Literature ReviewAn academic discussion on whether financing on both corporate and sovereign level should be bank-based or market- based has taken place for a long period of time where the academic research on the topic concentrates in the period mid-1990s early 2000s. Langfield and Pagano (2016) explain that since the early 1990s, Europe’s banking system has expanded rapidly, where Europe’s capital market experienced moderate changes
The analysis revealed that Latvia had a comparatively developed bond market and its corporate segment
While corporate sector forms the base of the country economy, an influence of the corporate financing into the entire economy is studied by dividing the economies into being based on bank financing and market financing
Summary
Literature ReviewAn academic discussion on whether financing on both corporate and sovereign level should be bank-based or market- based has taken place for a long period of time where the academic research on the topic concentrates in the period mid-1990s early 2000s. Langfield and Pagano (2016) explain that since the early 1990s, Europe’s banking system has expanded rapidly, where Europe’s capital market experienced moderate changes. An academic discussion on whether financing on both corporate and sovereign level should be bank-based or market- based has taken place for a long period of time where the academic research on the topic concentrates in the period mid-1990s early 2000s. The second wave of academic interest to the topic could be observe in mid-2010, where the reflections from the financial crisis and proximity of Capital Market Union initiative by the European Commission stimulated the discussion. The practice of dividing market and bank financing is used to characterize the entire economy. While corporate sector forms the base of the country economy, an influence of the corporate financing into the entire economy is studied by dividing the economies into being based on bank financing and market financing. Studies by Levine (1997, 2002) summarize academic views by dividing market-based and bank-based approach:
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