Publication: Rethinking the State's Role in Finance
Date
2013-04
ISSN
Published
2013-04
Author(s)
Abstract
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.
Citation
“Čihák, Martin; Demirgüç-Kunt, Asli. 2013. Rethinking the State's Role in Finance. Policy Research Working Paper;No. 6400. © World Bank, Washington, DC. http://openknowledge.worldbank.org/entities/publication/8aaeee0f-e66d-5cdc-826b-e79958f37a28 License: CC BY 3.0 IGO.”
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