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Overview of Financial Development Issues Thorsten Beck World Bank Outline Goal of the development assessment Analytical/research underpinning Conducting the development assessment Linking functional and institutional approaches Typical components Characteristic messages Functions of financial markets Ease the exchange of goods and services Mobilize and pool savings Savings services Produce information ex ante about possible investments and allocate capital Payment services Credit services Monitor investments and exert corporate governance after providing finance Facilitate the trading, diversification and management of risk Financial institutions and markets Financial intermediaries Financial markets Collect savings and intermediate in the form of debt, collect proprietary information about debtors and monitor them directly Attract savings in the form of debt or equity instruments to provide resources for firms; information collection and dissemination through price mechanism Contractual savings and insurance Mobilize savings through contingent contracts, offer risk management services, provide investment resources in different forms (institutional investors) Goal of development assessment Benchmark provision (quantity, quality and cost) of the key financial functions and services that support growth Identify obstacles to efficient provision Recommend policy actions -4 -2 0 2 4 6 Finance helps foster growth… -3 -2 -1 0 E( Private Credit | X ) coef = 1.0144739, (robust) se = .22245392, t = 4.56 1 2 … and alleviate poverty Benchmarking Available quantification covers both quantitative measures of performance… (e.g. depth, activity, reach, cost and price efficiency) …and some qualitative indicators of infrastructures (e.g. on legal, regulatory and informational infrastructures) … and more recently, some quantification of penetration More on this later Quantitative Data Financial depth of financial institutions and markets M2 to GDP Private Credit to GDP Efficiency of service provision Interest spreads Market liquidity Qualitative Data on Infrastructures Legal Informational Payments and settlements Government Accounting & auditing / transparency Credit & property registries Transaction technology Creditor protection; bankruptcy; corporate governance… Including regulatory “style” Ownership Typical Obstacles Gaps in the financial infrastructure Flaws in regulatory or tax policy legal, information and regulatory systems (soft) transactional technology (incl payments & settlements; communications generally (harder) (including competition policy) Deeper governance issues impeding policymaking (esp. favoring incumbents over newcomers). Issues in the development assessment (1) Market Infrastructure for Access Collateral and bankruptcy laws; competent and impartial courts; Information infrastructure (e.g. credit registry, accounting and auditing, rating agencies) Payments: is the system competitive & reasonable in cost? Monopoly Power and Related Distortions Detecting evidence of market power (e.g. use of cross-country regressions) Positive and negative policy to limit damage Permissive entry and legislative environment Minimum scale issues and globalization Issues in the development assessment (2) Special Institutions for Access E.g. development banks, microfinance Issues include subsidies, incentives, burdensome regulation The Demand Side Assessing unmet needs of corporates & households (not easy - data deficiencies, including for crosscountry benchmarking) Issues in the development assessment (3) Other cross-cutting aspects of policy environment Taxation/subsidization of intermediation Missing products/markets E.g. leasing/factoring, why missing: underlying laws, regulations, tax? Cross-sectoral competition aspects Distorting or inhibiting subsectors or key instruments E.g. banking vs. NBFIs; banking vs. securities markets Damaging side-effects of over-heavy prudential rules The methodological challenge: functions versus silos Statistics, regulation and market performance remains segmented along lines defined by institutional/organizational form (“silos”). Though cross-cutting infrastructures are also central. But development aspects need to be analyzed and reported along functional lines. Combining the perspectives (of functions and sectoral silos) The development assessment has two phases: Information gathering phase 1. Including infrastructural and sectoral Analytical and reporting phase 2. Evidence to be distilled by mission leaders using functional perspective 1. Information gathering phase a) b) c) d) Infrastructural reviews Sectoral reviews (industry & regulation) The demand side Missing markets & other cross-cutting issues a) Infrastructural reviews Legal Informational Payments and settlements Government Accounting & auditing / transparency Credit & property registries; rating agencies Transaction technology Creditor protection; bankruptcy; corporate governance; competent & impartial courts… Including regulatory “style” Ownership b) Sectoral reviews (examples) Banking etc. (also devt. banks, mortgage finance & other specialized institutions & MFIs) Insurance and contractual savings Including competitiveness, ownership, efficiency, entry, unneeded regulatory impediments (e.g. on microfinance)… Including public pension funds E.g. market penetration, product range, asset portfolio Securities markets E.g. liquidity, transactions costs, scale, linkage to ROW c) The demand side Corporate sector assessment Infer unmet service needs from their financing patterns etc. Households Reach of mainstream and microfinance (including credit cooperatives etc) 2. Analytical and reporting phase Delivering the message: Describe the functional gaps E.g. lack of term finance; no venture capital; high intermediation costs; limited access; nascent insurance industry… Pinpoint the source(s) of the gaps and deficiencies Propose strategic approach to solution highlighting cross-sectoral aspects Development versus stability? Usually mutually supportive (An insolvent banking system cannot provide the needed service) Occasionally conflicting “Belt-and-braces” approach may damage effectiveness of banks without helping safety Example: Powerful bank supervisors might help stability, but are also associated with higher corruption in lending