The design of policies to foster financial system stability and development has become a key area of focus among policy makers globally. This policy focus reflects the growing evidence that financial sector development can spur economic growth whereas financial instability can significantly harm growth and cause major disruptions, as was seen in the financial crises of the 1980s and 1990s (World Bank 2001). This focus also reflects the recognition that close two-way linkages between financial sector soundness and performance, on the one hand, and macroeconomic and real sector developments, on the other hand, need to be considered when designing macroeconomic and financial policies. Moreover, although the development and international integration of financial systems can strengthen access to foreign capital and can promote economic growth, there is a risk of cross-border spillovers of financial system disturbances. Effective surveillance of national financial systems, along with a harmonization and international convergence of key components of financial policies, will help minimize those types of risks and will promote orderly development of the financial system. Thus, financial stability considerations and financial sector development policies are intrinsically interlinked.
Information and governance infrastructure for finance provides the foundation for financial development and effective market discipline, and it helps to reinforce official supervision. It refers (a) to the legal and institutional arrangements and structures that affect the quality, availability, and transparency of information on monetary and financial conditions and policies at various levels and (b) to the incentives and organizational structures to set and implement policies by regulators, the regulated institutions, and their counterparties. The information infrastructure includes (a) the framework for monetary and financial policy transparency (discussed in section 10.1); (b) the accounting and auditing framework that helps to define and validate the information that is disclosed to the public and the regulatory authorities (discussed in section 10.2); and (c) the arrangements to compile, process, and share information on financial conditions and credit exposures of borrowers and other issuers of financial claims (credit-reporting and financial information services, discussed in section 10.3).
Systemic liquidity infrastructure refers to a set of institutional and operational arrangements—including key features of central bank operations and of money and securities markets—that have a first-order effect on market liquidity and on the efficiency and effectiveness of liquidity management by financial firms (see Dziobek, Hobbs, and Marston 2000). Key features of financial market infrastructure and financial policy operations that affect liquidity management include the following:
The development of a financial sector necessarily involves a wide range of policy actions, and structural and institutional reforms. Those actions and reforms cover the design of instruments and operational arrangements for markets; the licensing and restructuring of institutions; and the development of the associated legal, information, and liquidity infrastructure. Given the multitude of policy actions and operational reforms to be implemented, the following question naturally arises: What principles and criteria should be considered in setting policy priorities among various policy and institutional reforms? All financial sector assessments present the findings in priority, showing high-priority actions of some urgency for the short term and then listing medium- and long-term structural measures. How should such priorities be set?
This chapter presents an overview of quantitative indicators of financial structure, development, and soundness. It provides guidance on key system-wide and sectoral indicators, including definitions, measurement, and usage. Key data sources for these indicators are explained in appendix C (Data Sources for Financial Sector Assessments). Detailed analysis and benchmarking of these indicators are discussed in chapters 3 and 4. More detailed data requirements are presented in appendix B (Illustrative Data Questionnaires for Comprehensive Financial Sector Assessments).
Financial system stability in a broad sense means both the avoidance of financial institutions failing in large numbers and the avoidance of serious disruptions to the intermediation functions of the financial system: payments, savings facilities, credit allocation, efforts to monitor users of funds, and risk mitigation and liquidity services. Within this broad definition, financial stability can be seen in terms of a continuum on which financial systems can be operating inside a stable corridor, near the boundary with instability, or outside the stable corridor (instability).1
Extensive evidence confirms that creating the conditions for a deep and efficient financial system can contribute robustly to sustained economic growth and lower poverty (e.g., see Beck, Levine, and Loayza 2000, Honohan 2004a, and World Bank 2001a). Moreover, in all levels of development, continued efficient and effective provision of financial services requires that financial policies and financial system structures be adjusted as needed in response to financial innovations and shifts in the broader macroeconomic and institutional environment.
This chapter looks at the legal, institutional, and policy framework needed to ensure effectiveness of financial sector supervision. It focuses on banking, insurance, and securities markets. Effective supervision, however, depends on a legal and institutional environment that provides the necessary preconditions. Those preconditions include the following:
This chapter focuses on issues in the regulation of a range of non-bank financial institutions (NBFIs), categorized as Other Financial Intermediaries (OFIs). OFIs refer to those financial corporations that are primarily engaged in financial intermediation—that is, corporations that channel funds from lenders to borrowers through their own account or in auxiliary financial activities that are closely related to financial intermediation—but are not classified as deposit takers (IMF 2004a).1 OFIs include insurance corporations; pension funds; securities dealers; investment funds; finance, leasing, and factoring companies; and asset management companies. This chapter discusses considerations in assessing the regulation and supervision of OFIs (other than insurance companies and security market intermediaries) generally, with a focus on specialized finance institutions, leasing and factoring companies, and pension funds.
The providing of financial services to the poor and the very-poor, particularly in rural areas, is the purpose of microfinance institutions (MFIs), and the assessment of the regulatory framework for MFIs is part of broader assessment of adequacy of access. Access, however, is multidimensional, and assessing its adequacy requires a review of (a) the range of financial services provided—and target groups served—by several tiers of formal, semiformal, and informal financial institutions; (b) the demand for financial services from households, microenterprises, and small businesses at different levels of the income strata; and (c) the different combinations of financial service providers, the users of those services, and the range of services that prevail in different geographical segments of the market. The primary objectives of the assessment of the adequacy of access are (a) to identify the gaps that exist (and that need to be corrected) in the range of products that are available for different layers of households, microenterprises, and small businesses in various geographic markets; and (b) to assess whether the regulatory framework for financial transactions helps expand or restrict access to the needed financial services.