World Bank Urges Governments to Moderate Banking Intervention

Governments should promote transparency and competition in the financial industry instead of seeking state ownership of banks that sacrifice efficiency and create market distortions, according to a World Bank report.

Public sector involvement in finance should not reduce private sector incentives, the World Bank said today in its Global Financial Development Report. The study warned that lending by state-owned banks tends to be more prone to credit misallocation.

The report coincides with the fourth anniversary of the Lehman Brothers Holding Inc. collapse, which triggered the biggest global economic downturn since the Great Depression. The crisis sparked intervention in companies from Bank of America Corp. to Spain’s Bankia (BKIA) SA, while state development banks such as Brazil’s BNDES increased lending to spur demand. Governments need to focus on providing supervision and ensuring competition in the financial sector, said World Bank Group Managing Director Mahmoud Mohieldin.

“They need to support financial infrastructure, such as better quality credit information that is shared more systematically,” Mohieldin said in a press release accompanying the report. “As we emerge from the global financial crisis, governments may want to consider shifting toward indirect interventions.”

The World Bank report examined financial sector data from 200 countries. Researchers considered factors including the size of financial institutions and markets, financial access, efficiency, and stability.

Recommendations

The World Bank warned against over reliance on state-owned banks, noting that they might crowd out more effective private institutions. Since the 2008 crisis, state-owned banks in developing countries such as India, Tunisia, Brazil and China have assumed a more active role in lending credit, the report said.

Policy makers should enact less complex regulations, which will help facilitate transparency. Governments should also take steps to implement policies that guarantee market accountability, the flow of credit information and contract enforceability.

The World Bank said the degree of state involvement in finance helped determine the pace of economic recovery since the 2008 crisis.

“The quality of a state’s policy for the financial sector matters more than the economy’s level of development,” the report said.

To contact the reporter on this story: Matthew Malinowski in Santiago at mmalinowski@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.

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