Rethinking the State's Role in Finance

The global financial crisis has given greater credence to the idea that active state involvement in the financial sector can be helpful for stability and development. There is now evidence that, for example, lending by state-owned banks has helped in mitigating the impact of the crisis on aggregate credit. But evidence also points to negative longer-term effects of direct interventions on resource allocation and quality of intermediation. This suggests a need to rebalance the state's roles from direct to less direct involvement, as the crisis subsides. The state does have very important roles, especially in providing well-defined regulations and enforcing them, ensuring healthy competition, and strengthening financial infrastructure. One of the crisis lessons is the importance of getting the basics right first: countries with complex but poorly enforced regulations suffered more during the global crisis. Evidence also suggests that instead of restricting competition, the state needs to encourage contestability through healthy entry of well-capitalized institutions and timely exit of insolvent ones. There is also new evidence that supports the state's key role in promoting transparency of information and reducing counterparty risk. The challenge of financial sector policies is to better align private incentives with public interest, without taxing or subsidizing private risk-taking.

Bibliographic Details

Main Authors:	Čihák, Martin, Demirgüç-Kunt, Asli
Language:	English en_US
Published:	World Bank, Washington, DC 2013-04
Subjects:	ACCESS TO FINANCE, ACCESS TO FINANCIAL SERVICES, ACCESS TO INFORMATION, ACCOUNTABILITY, AGENCY PROBLEMS, ARBITRAGE, AUDITS, BAILOUTS, BALANCE SHEETS, BANK ACCOUNTS, BANK CAPITAL, BANK COMPETITION, BANK CREDIT, BANK HOLDING, BANK HOLDING COMPANIES, BANK LENDING, BANK MARKET, BANK REGULATION, BANK REGULATORY AGENCIES, BANK RUN, BANKING CRISES, BANKING CRISIS, BANKING REGULATION, BANKING SECTOR, BANKING SYSTEM, BANKING SYSTEMS, BANKS, BARRIERS TO ENTRY, BENEFITS OF CREDIT, BUSINESS CYCLE, CAPITAL REQUIREMENTS, CENTRAL BANK, CENTRAL BANKS, CHECKS, CLEARING HOUSE, COMMERCIAL BANK, COMMERCIAL BANKS, COMMERCIAL PAPER, COMPETITION POLICY, CONSUMER CREDIT, CONSUMER LOAN, CONSUMER PROTECTION, CONSUMER PROTECTION LAWS, CONTAGION, CONTAGIOUS BANK RUNS, CONTRACT ENFORCEABILITY, CORPORATE CONTROL, CORPORATE DEBT, CREDIT ALLOCATION, CREDIT BUREAU, CREDIT CRUNCH, CREDIT GUARANTEE, CREDIT GUARANTEES, CREDIT INFORMATION, CREDIT MARKET, CREDIT MARKETS, CREDIT PRACTICES, CREDIT PROVIDERS, CREDIT REGISTRY, CREDIT REPORTING, CREDIT REPORTING SYSTEMS, CREDITORS, CRISIS COUNTRIES, DEBT, DEPOSIT, DEPOSIT INSURANCE, DEPOSIT INSURANCE COVERAGE, DEPOSITORS, DEPOSITS, DERIVATIVES, DERIVATIVES MARKETS, DEVELOPING ECONOMIES, DEVELOPMENT BANK, DEVELOPMENT BANKS, DIRECT GOVERNMENT INTERVENTIONS, ECONOMIC CRISIS, ECONOMIC DEVELOPMENT, ECONOMIC GROWTH, ECONOMIC POLICY, ECONOMIC STABILITY, ECONOMICS, EMERGING MARKETS, EQUITY STAKES, EXPORT FINANCING, EXTENSION OF CREDIT, EXTERNALITIES, FINANCIAL ACCESS, FINANCIAL CRISES, FINANCIAL CRISIS, FINANCIAL DEPTH, FINANCIAL DEVELOPMENT, FINANCIAL INFORMATION, FINANCIAL INFRASTRUCTURE, FINANCIAL INNOVATION, FINANCIAL INSTITUTION, FINANCIAL INSTITUTIONS, FINANCIAL INSTRUMENTS, FINANCIAL INTERMEDIARIES, FINANCIAL INTERMEDIATION, FINANCIAL MARKETS, FINANCIAL POLICIES, FINANCIAL PRODUCTS, FINANCIAL REFORM, FINANCIAL REGULATION, FINANCIAL SECTOR, FINANCIAL SECTOR INFRASTRUCTURE, FINANCIAL SECTOR POLICIES, FINANCIAL SERVICES, FINANCIAL STABILITY, FINANCIAL STUDIES, FINANCIAL SUSTAINABILITY, FINANCIAL SYSTEM, FINANCIAL SYSTEMS, FINANCIAL TRANSACTIONS, FLOW OF INFORMATION, GLOBAL BANKING, GLOBAL FINANCE, GOVERNMENT ACTION, GOVERNMENT AID, GOVERNMENT BANK, GOVERNMENT INTERVENTION, GOVERNMENT INTERVENTIONS, GOVERNMENT OWNERSHIP, GOVERNMENT POLICIES, GOVERNMENT POLICY, GUARANTEE SCHEMES, INFORMATION ASYMMETRIES, INFORMATION DISCLOSURE, INFORMATION SHARING, INTERBANK MARKETS, INTERBANK MONEY MARKETS, INTEREST RATES, INTERNATIONAL BANK, INTERNATIONAL DEVELOPMENT, INVESTMENT BANKING, LAWS, LEGAL FRAMEWORK, LEGISLATION, LENDER, LENDERS, LENDING BEHAVIOR, LENDING PATTERNS, LENDING PORTFOLIO, LEVEL PLAYING FIELD, LIQUIDITY, LIQUIDITY PROBLEMS, LOAN, LOAN MARKETS, LOAN PORTFOLIOS, LOAN PROGRAMS, LOCAL BANKS, MANDATES, MARKET DEVELOPMENTS, MARKET DISCIPLINE, MARKET EFFICIENCY, MARKET FAILURES, MARKET STRUCTURE, MATURITY, MATURITY MISMATCH, MICROFINANCE, MONETARY FUND, MORAL HAZARD, MORTGAGE, MORTGAGE LENDING, NATIONAL CREDIT, NONBANK FINANCIAL INSTITUTIONS, PAYMENT SYSTEM, PAYMENT SYSTEMS, POLITICAL SYSTEM, PRIVATE BANKS, PRIVATE FINANCIAL INTERMEDIARIES, PRIVATE LENDERS, PUBLIC BANK, PUBLIC POLICY, REAL ESTATE, REGULATOR, REGULATORY AGENCY, REGULATORY FRAMEWORK, REGULATORY PRACTICES, REPAYMENT, RESOURCE ALLOCATION, RETURNS, RISK CONTROLS, RISK MANAGEMENT, RISK MANAGEMENT TOOLS, RISK TAKING, SECURITIES, SECURITIES MARKETS, SECURITIES TRANSACTIONS, SECURITIZATION, SETTLEMENT, SETTLEMENT INFRASTRUCTURE, SETTLEMENT SYSTEMS, SHAREHOLDERS, SHORT-TERM LIQUIDITY, SOCIAL WELFARE, SOLVENCY, STABILITY OF PAYMENT SYSTEMS, STATE BANK, STATE BANKS, STATE GUARANTEES, STATE OWNED BANKS, STATISTICAL ANALYSIS, SUPERVISORY FRAMEWORK, SYSTEMIC RISK, TERM CREDIT, TRADING, TRANSACTION, TRANSPARENCY, TRANSPARENCY OF INFORMATION, UNEMPLOYMENT, UNION,
Online Access:	http://documents.worldbank.org/curated/en/2013/01/17532460/rethinking-states-role-finance https://hdl.handle.net/10986/13197
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