Financial Markets and Development Conference Should state-owned financial institutions be privatized or reformed?
| Author | Aditya Narain |
| Position | IMF Monetary and Financial Systems Department |
| Pages | 155-157 |
Page 155
In many countries, the state has a major presence in the financial sector. This is particularly so in banking, where, despite several privatization initiatives over the past decade, public sector banks still account for an estimated 40 percent of total banking sector assets. State intervention also extends, albeit to a lesser degree, to insurance schemes and investment funds. And, though it is often more prominent in the developing world, state intervention can also play an important role in the developed world, taking various forms of intervention from explicit (banking in Germany) to implicit (government-sponsored enterprises in the United States).
Supporters cite a number of rationales for state intervention- notably, information failures, economic disequilibrium, failure of competition, incomplete markets, and the need to redistribute resources according to a social agenda. Detractors insist there are wideranging downsides, including distortions in credit allocation, thwarted competitive forces, limited supervisory effectiveness, and clouded budgetary processes. All of which, they argue, lead to frequent recapitalization and increased scope for patronage and corruption. What seems clear, despite a growing emphasis on private ownership of financial institutions in recent years-especially in Europe and Latin America-is that the state is likely to remain a dominant player in the financial sector for some time to come. If this is the case, the conference suggested, there is value both in examining the role these institutions play (and how their supervision and governance can be strengthened) and in evaluating experiences with privatization. Not surprisingly, banks remained at center stage, and practices in developing countries received the bulk of attention. One clear view that emerged was that whether bank or nonbank, an institution that represented a contingent liability to the state required effective governance and supervision, though the form of this supervision would need to be shaped by the specific context.
What do we know about supervisory practices? David Marston (IMF) reported on a survey of practices in 22 countries that covered, among a wide range of operations, commercial and development banks, insurance companies, and...
To continue reading
Request your trial