by Deepening and broadening of financial access should be an important public policy objective. Better financial access translates into robust economic growth, as more firms are able to make profitable investments. It also enhances financial stability, for example, by allowing firms to hedge their risks, or more easily obtain refinancing if in financial distress. Lastly, broader access to finance also reflects the values of social justice by contributing to equal economic opportunities.
To achieve a fundamental increase in financial access, public policy should target its main Determinants institutional and financial system development.
The principal institutional dimensions are:
- Well defined commercial property rights, including:
- Effective contract enforcement;
- Collateral pledging and claiming mechanisms;
- Bankruptcy procedures; and
- Investor protection and corporate governance systems.
- An environment that fosters transparency, including adequate accounting principles and other mechanisms enabling credible disclosure.
The principal financial system dimensions are:
- Efficient financial regulation and supervision;
- An ownership structure of financial institutions, reflecting:
- A clear and focused role for state financial institutions, if they exist;
- The degree of foreign ownership reflecting the country-specific benefits and costs; and
- Controls on the negative effects of bank-industry cross-ownership.
- An entry and competition policy that balances entry opportunities with preserving the charter value of financial institutions;
- Crisis resolution tools, such as deposit insurance, liquidity support mechanisms, effective financial institutions bankruptcy procedures; and
- Financial infrastructure, such as the payments system and credit databases.
The institutional and financial system development policies are necessary to achieve a fundamental increase in financial access, and should, therefore, be regarded as a priority. However, there can be a number of problems in their implementation. Firstly, even the best fundamental development policies, especially those targeting institutional improvements, may have very long gestation periods. The government may have the need to provide more immediate transitory solutions. Secondly, there can be genuine market failures restricting access to finance, which cannot be resolved by improving the overall economic environment, but may require more targeted and direct government interventions.
When fundamental financial access policies do not work due to long gestation, genuine market failures, or political opposition governments may choose to correct for the lack of market-based finance by the public provision of missing financial services. Undoubtedly, well-designed interventions by a “noble” and efficient government can indeed provide transitory solutions to complement long-term development policies and correct financial market failures. But, in practice, governments are commonly not fully “noble,” but influenced by special interests. The efficiency of governments is also commonly limited by bureaucratic incentive structures.
As a result, even when market failures create a theoretical field for social welfare improving interventions, practical government failures may in fact be more distortionary than the market shortcomings they were intended to address, and render public involvement undesirable. Put differently, market failures by themselves do not warrant public intervention. Recognizing its limitations, government should act only if it can address the economic imperfection better than the market. In practice, however, governments around the world are often excessively interventionist, in which case their policies may compromise rather than improve social welfare.
Regulatory Perspective
Despite the recognized risks and costs, public financial institutions are an important part of the financial landscape around the world. Public financial institutions are commonly associated with developing countries, which turn to them when their growing real sector potential seems to outrun financial system capacities. In practice, however, public financial institutions exist and are often prominent even in the most financially developed countries.
The establishment of government financial services is typically a political decision on which financial regulators may have only limited influence. Therefore, they view the decision on the creation, preservation, or liquidation of public financial institutions as given. The relevant question is how the regulators should respond to such decisions. The response should seek to maximize possible benefits of enhanced financial access, while seriously acknowledging potential costs and risk, and seeking to contain them. While possibly not having direct authority, regulators may contribute to the public discussion on the rationale and optimal design of public financial institutions.
