November 27, 2012

It’s a pleasure to join you in saluting today’s launch of the “Global Financial Development Report.” This report builds on the expertise and experience of many specialists within the Bank Group.

This report is an integral part of our commitment to provide knowledge, operational support and lending to developing economies.

The Bank Group continues to work closely with our member countries to support the development and stability of their financial systems.

Our engagement in financial-sector issues has become even stronger since the onset of the global economic crisis. The financial sector’s share of all World Bank Group lending doubled during the crisis – going from 8 percent before the crisis to 16 percent at its peak.

Our work aims to ensure that our member countries’ financial sector contributes to strong and inclusive growth.

Our work covers a range of issues, from regulation to corporate governance and financial infrastructure, to name just a few.

The report builds on that body of work, and it distills many lessons that are relevant both for individual countries and for the global policy debate.

It highlights the sometimes-overlooked perspective of emerging markets and developing economies.

As Mahmoud said, this report is a product of a successful marriage of research with operational work.

I’ll focus my remarks on the report’s linkages to our operational work in the financial sector.

Let me illustrate this by noting four brief points.

The first point relates to benchmarking financial development.

Almost every time we go to a member country to assess its financial sector, we are asked how it compares to others in terms of depth, access, efficiency and stability.

So, comparing and benchmarking financial institutions and markets is an important part of what we do.

One of the key contributions of the report is that it makes publicly available a massive dataset on financial-system characteristics.

Parts of this dataset have been available before internally, but we have now put all the data together, cleaned them up and made them available to broad audiences for the first time.

This was a joint project among our researchers, our operational experts, and our data-compilation experts.

The second point relates to regulation and supervision.

One of the report’s key points is that the quality of financial-sector policies matters more than a country’s level of development.

On the surface, the main contrast between this global crisis and those in recent years seems to be that developed economies were affected much more strongly and more directly than were developing economies.

Indeed, many developing economies had limited exposure to the risky behaviors that precipitated the meltdown, and most averted outright distress.

Both Malaysia and Peru, for example, have won praise for their prudent policies.

Some developed financial systems (such as those of Australia, Canada, and Singapore) have shown remarkable resilience so far . . . although the financial systems in some countries – both emerging and developing (including a few in Eastern Europe) – have been brought to the brink of collapse.

So, the overall point is: The quality of a country’s policy for its financial sector matters much more than the economy’s level of development.

In this area: What the report does is quite interesting.

It asks about the common traits among countries that fared relatively well during the crisis, and about their differences from countries that were hard-hit by the crisis.

To answer that question, the report builds on an extensive World Bank survey of banking regulation and supervision around the world.

As Asli said, the report finds that non-crisis countries tended to have less complex but stronger and better-enforced regulations.

They had more stringent definitions of capital; they were more rigorous in calculating capital requirements for credit risks; they were more likely to require extra provisions on loans, and so on.

They also provided more scope for market incentives. The report supports this with evidence, and the underlying datasets are all available for anyone to use.

The report’s call for relatively simple regulations – which are strong and well-enforced – resonates well with our country work.

In our assessments under the Financial Sector Assessment Program, we find that developing countries often lack sufficient capacity to implement and enforce the regulatory rules that are on the books.

In addition, we often find that supervisory capacity is lacking. In some cases, we provide technical advice to help build that capacity.

Relatively simpler but stronger regulations can help, because they are easier to enforce.

In other words, less can be more.

The report’s take on the role of the state as regulator and supervisor is an excellent example of collaboration between research and operational work.

Here, the research team that analyzed the datasets worked very closely with our Financial Systems Global Practice.

Many of the report’s findings integrate conclusions from our assessments under the FSAP Program and our other operational work.

The third point relates to state-owned banks – a topic that has been hotly debated since the start of the crisis.

Many countries – especially emerging markets and developing economies – turned to state-owned banks to overcome the credit crunch.

In such countries as Chile and Tunisia, governments pumped capital into state banks to cover existing loans – or to provide new credit to exporters or small- and medium-sized firms.

South Korea raised the credit ceilings of state-owned banks; India and Tunisia set up credit lines for those banks; and Brazil’s and China’s largest state-owned banks expanded credit dramatically during the crisis.

The report finds that such interventions helped counter the spread of the crisis – but they carry a significant price in terms of inefficient, and sometimes politically motivated, lending.

That, in turn, led to distortions that were amplified as capital was pumped into state banks – or as new credit lines were set up for them to encourage lending to exporters and smaller enterprises.

In some instances, state banks continued to extend credit even during the economic recovery – raising concerns that they may crowd out private banks.

Past and new research on financial crises reveals that government ownership of banks is associated with lower levels of financial development, more financial instability and slower economic growth.

The report recommends that policymakers carefully consider the risks as well as the potential benefits posed by state-owned banks – and that they pay attention to governance issues.

The report has some suggestions in this regard. It also warns that these cautious steps can be challenging to implement – especially in weak institutional environments.

This topic of state-owned banks is operationally very important.

We work with national development banks and other state-owned banks in many countries.

We often provide technical advice on transforming those institutions, improving their operations, and so on.

Accompanying the report are several policy papers, summarizing our policy advice and outlining good practices in state-owned banks.

Also accompanying the report are results from a survey that fills some important gaps in information on development banks around the world.

The survey, which contains new data from 90 national development banks in 61 countries, examines how development banks operate; what their policy mandates are; what financial services they offer; which type of clients they target; how they are regulated and supervised; what business models they have adopted; what governance framework they have; and what challenges they face.

The work on this part of the report was conducted in very close cooperation with our Financial Systems Global Practice.

A few weeks ago, we organized a session at our Network’s conference – the 2012 FPD Forum – where we heard from a couple of panelists from better-managed development banks.

They shared their experiences on how to limit political influence and handle other challenges.

For my fourth and final point: I’d like to say a few words on financial infrastructure.

This is not usually seen as a glamorous topic. Some might even consider it downright boring. Yet it is a very important area.

The global financial crisis has highlighted the importance of having good “plumbing” for the financial sector – and has highlighted the importance of a resilient financial infrastructure.

It has also reignited the debate over what role the state should play in its development.

Again, this part of the report reflects lessons from our operational work on credit information systems and on payment systems.

Transparent credit information is a prerequisite for sound risk management and financial stability.

However, due to monopoly rents in the market for credit information, information-sharing among private lenders may not arise naturally.

This creates an important rationale for the involvement of the state.

In our operational work, we often find credit reporting systems that cover only risks in the traditional financial sector. This limits their effectiveness in supporting credit market efficiency and stability.

The report emphasizes that an important role of the state in this area is to help extend the coverage of credit reporting systems – to include non-regulated lenders – such as nonbank financial institutions and microfinance lenders – in existing credit reporting systems.

The report also illustrates that the state can help establish market infrastructure to manage and mitigate counterparty risk.
This includes robust payment systems and, potentially, support for the development of collateralized interbank markets.

There is significant scope for state involvement in the development of a robust infrastructure for securities and derivatives settlements.

The state can further reduce counterparty and settlement risks by monitoring these transactions and their clearing and settlement arrangements. Again, this is operationally a very important area.

To summarize: This report builds on our operational work, and it is also quite useful for our follow-up with member countries.

We are getting a strongly positive reaction to this report – and we are looking forward to its further dissemination and to receiving additional feedback.

And I’m certainly looking forward to the insights and questions that our audience will offer us here today.