Notes on Financial System Development and Political Intervention

The paper studies the impact of political intervention on a financial system that consists of banks and financial markets and develops over time. In this financial system, banks and markets exhibit three forms of interaction: they compete, they complement each other, and they co-evolve. Coevolution is generated by two new ingredients of financial system architecture relative to the existing theories: securitization and risk-sensitive bank capital. The authors show that securitization propagates banking advances to the financial market, permitting market evolution to be driven by bank evolution, and market advances are transmitted to banks through bank capital. Then they examine how politicians determine the nature of political intervention designed to expand credit availability. The authors find that political intervention in banking exhibits a U-shaped pattern, where it is most notable in the early stage of financial system development (through bank capital subsidy in exchange for state ownership of banks) and in the advanced stage (through direct lending regulation). Despite expanding credit access, political intervention results in an increase in financial system risk and does not contribute to financial system evolution. Numerous policy implications are drawn out.

Bibliographic Details

Main Authors:	Song. Fenghua, Thakor, Anjan
Format:	Policy Research Working Paper biblioteca
Language:	English en_US
Published:	World Bank, Washington, DC 2013-01
Subjects:	ALLOCATION OF CAPITAL, ALLOCATION OF CREDIT, ASSET-BACKED SECURITIES, ASSET-LIABILITY MATCHING, ASYMMETRIC INFORMATION, BACKED SECURITIES, BAD CREDIT, BALANCE-SHEET, BANK CAPITAL, BANK DEBT, BANK EQUITY, BANK FAILURES, BANK FINANCING, BANK LENDING, BANK LOAN, BANK LOANS, BANK PROFITABILITY, BANK PROFITS, BANKING INDUSTRY, BANKING SCOPE, BANKING SECTOR, BANKING SYSTEM, BANKING SYSTEM DEVELOPMENT, BANKS, BONDS, BORROWER, BRIBES, CAPACITY BUILDING, CAPITAL ALLOCATION, CAPITAL MARKET, CAPITAL MARKET FINANCING, CAPITAL MARKETS, CAPITAL REQUIREMENT, CAPITAL REQUIREMENTS, CAPITAL STRUCTURE, CD, COMMERCIAL PAPER, COMPETITIVE MARKETS, COORDINATION FAILURES, CORPORATE GOVERNANCE, COST OF CREDIT, CREDIT ACCESS, CREDIT ANALYSIS, CREDIT AVAILABILITY, CREDIT DECISION, CREDIT EXTENSION, CREDIT INFORMATION, CREDIT MARKET, CREDIT MARKETS, CREDIT QUALITIES, CREDIT QUALITY, CREDIT RATING, CREDIT RATING AGENCIES, CREDIT RATIONING, CREDIT REPORTING, CREDIT RISKS, CREDIT TERMS, CREDITOR, CREDITOR RIGHTS, CREDITORS, CREDITWORTHY BORROWER, CREDITWORTHY BORROWERS, DEBT, DEBT CONTRACTS, DEBT SECURITY, DENIAL OF CREDIT, DEPENDENT, DEPOSIT, DEPOSITS, DIRECT BANK LENDING, ECONOMIC ACTIVITY, ECONOMIC DEVELOPMENT, ECONOMIC EFFICIENCY, ECONOMIC GROWTH, ECONOMICS, EMERGING MARKETS, EQUITY CAPITAL, EXCLUSION, EXTERNAL FINANCE, EXTERNAL FINANCING, FEDERAL RESERVE, FINANCES, FINANCIAL CONTRACTS, FINANCIAL CRISES, FINANCIAL CRISIS, FINANCIAL DEVELOPMENT, FINANCIAL FRAGILITY, FINANCIAL INNOVATION, FINANCIAL INSTITUTIONS, FINANCIAL INTERMEDIARIES, FINANCIAL INTERMEDIARY, FINANCIAL INTERMEDIATION, FINANCIAL MARKET, FINANCIAL MARKETS, FINANCIAL STRUCTURE, FINANCIAL STUDIES, FINANCIAL SUPPORT, FINANCIAL SYSTEM, FINANCIAL SYSTEM DEVELOPMENT, FINANCIAL SYSTEM STABILITY, FINANCIAL SYSTEMS, FINANCIERS, FINANCING SOURCES, FIXED COST, FORMS OF CREDIT, GOVERNMENT INTERVENTION, GOVERNMENT INTERVENTIONS, GOVERNMENT OWNERSHIP, GOVERNMENT SUBSIDIES, HOLDING, HOME PURCHASES, HOMEOWNERSHIP, INFORMATION ACQUISITION, INFORMATION ASYMMETRIES, INFORMATION DISCLOSURE, INFORMATION DISCLOSURE COSTS, INFORMATION TECHNOLOGY, INFORMATIONAL ASYMMETRIES, INFORMED INVESTOR, INFORMED INVESTORS, INTERNATIONAL BANK, INVESTING, INVESTMENT DECISIONS, INVESTMENT OPPORTUNITIES, INVESTMENT PROCESS, JUDICIAL SYSTEM, JUDICIAL SYSTEMS, LABOR FORCE, LAWS, LEGAL SYSTEMS, LEGISLATION, LENDERS, LENDING REGULATION, LENDING REGULATIONS, LIABILITY, LIQUIDITY, LOAN, LOSSES ON BANKS, MACROECONOMIC CONDITION, MANDATE, MANDATES, MARKET DEVELOPMENT, MARKET DISTORTIONS, MARKET EQUILIBRIUM, MARKET FAILURE, MARKET FAILURES, MARKET FINANCES, MARKET INFORMATION, MARKET PRICE, MARKET PRICES, MARKET TRADING, MORTGAGE, MORTGAGES, OPTIMAL CONTRACTS, PARTICIPATION CONSTRAINT, PAYOFF, POLITICAL ECONOMY, POTENTIAL BORROWERS, PRICE FORMATION, PROFITABILITY, PROPERTY RIGHTS, PROPRIETARY INFORMATION, REAL SECTOR, RELATIONSHIP BANKING, RETURN, RETURNS, RISK SHARING, RISKY BORROWERS, SECURITIZATION, SECURITY PRICES, SHAREHOLDER, STOCK EXCHANGES, STOCK MARKETS, SYSTEMIC RISK, TELLERS, TRADING, TRADING VENUE, TRANSITION ECONOMIES, USE OF DEBT,
Online Access:	http://documents.worldbank.org/curated/en/2013/01/17206614/notes-financial-system-development-political-intervention http://hdl.handle.net/10986/13162
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