Banks and Money Markets
2 January 2022
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2 January 2022
Confidence in financial sectors
Determining the extent to which governments should interfere in the financial sector is a very sensitive task that must be determined by experts for each government and financial sector, individually. A competitive and innovative financial sector, however, does not mean a hands-off role for government. Government must take a strong but limited role to promote confidence, competition and the right kind of investment climate in the financial sector. It is important to recognize that attractiveness of the local financial sector to investors depends on its institutional foundations and structure. Crucially, local banks must command the confidence of depositors. The system must also be competitive, including suitability tests for new entrants and a fair and transparent mechanism for the restructuring or liquidation of insolvent institutions. Effective competition also requires that the financial sector is neither subject to arbitrary government influence nor captive of business interests.
Confidence in financial sectors requires
1_effective prudential regulation
2_ supervision of banks and non-bank financial institutions
3_ acceptable accounting and auditing practices.
It is worthy to mention that, The IMF and World Bank, together with the Basle Committee on Banking Supervision, IOSCO, IASC and bilateral donors, have traditionally focused on these regulatory issues.
· The characteristics of a healthy and effective competition in different financial sectors and privatization of these institutions:
This healthy competition was briefly mentioned above. In the first place, Competitive financial sectors also require the commercialization of state-owned institutions, to avoid market distortions and unfair practices. Where institutions remain in state ownership, they typically require substantial restructuring to operate according to strictly commercial criteria and to become viable participants in the financial sector. This restructuring can also be a first step toward privatization. The participation of quality strategic investors is an important element of a successful privatization, more so than the nationality. At the same time, it is important to recognize the significant benefits that foreign strategic investors can bring in terms of both additional capital and expertise.
The Bank will continue to encourage and support privatization of banks and non-bank financial institutions as a core activity, through participating in the financing and working with co-investors and the authorities to facilitate privatization.
· Country Operational Approach
A country-specific operational approach will be developed for each country of operations on the basis of the objectives and priorities established in this policy paper. The approaches will be based on assessments of:
· the main risks to macroeconomic stability;
· the key challenges facing the financial sector;
· the market mechanisms and financial institutions that will drive the process of financial sector development;
· the strengths and weaknesses of the legal, regulatory and supervisory framework;
· how the Bank’s investment projects and investment climate initiatives can best influence the process of financial sector development;
These assessments will assist in monitoring the Bank’s existing exposures and provide guidance for identifying the types of investment projects that should be supported by the Bank, as well as for setting priorities for other activities, such as technical co-operation and investment climate initiatives.
In the end, the financial sector operational approaches will be coordinated with the Bank’s country strategies and will be reflected in the country strategy papers as they are revised.
written by the Legal Institute of tamadon kohan rey
