Thursday, March 20, 2003

Financial Sector Assessments Program: Review, Lessons and Issues going forward

My written statement as an Executive Director of the World Bank, March 20, 2003

The financial sector’s role, the reason why it is granted a license to operate, is to assist society in promoting economic growth by stimulating savings, efficiently allocating financial resources satisfying credit needs and creating opportunities for wealth distribution. Similarly, the role of the assessor –in this case, the Bank– is to fight poverty, and development is a task where risks need to be taken.

From this perspective we have the impression that the Financial Assessment Program Report might revolve too much around issues such as risk avoidance, vulnerabilities, stress tests and compliance with international regulations, without referring sufficiently to how the sector is performing its social commitments.

As an example, only in Supplement 3, Development Issues in the FSAP, does the Bank acknowledge that; “for lower income countries with less-developed financial system, in order to be relevant to country authorities, the emphasis in the FASP must change… how residents can get a better access to a wider range of financial services”, having to confess, in the very same page, that “no formal methodologies exist for how to address development issues in the FSAP”.

Another example is present in the survey of countries’ experiences (Supplement 2), when in the case of Armenia, page 6, in response to the problems of “(i) weak credit culture with the prevalence of non-payments mechanism that undermine the development of the formal financial sector; (ii) limited access to formal, affordable financing by small and medium enterprises, a typical development trap in transition economies; and (iii) the slow pace of banking sector consolidation”, the only exemplified recommendations are; “(i) enhancement of the central bank’s ability to deal with insolvent banks, (ii) strengthening of penalty provisions and (iii) increase in minimum capital requirements”, 

On a separate issue, the document Global Development Finance 2003 discussed last week and in relation to the minimum capital requirements of the Basel II proposals, states that they “include the likelihood of increased costs of capital to emerging market economies; and an “unleveling” of the playing fields for domestic banking in favor of international banks active in developing countries”. We believe that this issue, and similar ones, should be addressed in many FSAPs, specially as the Bank could perhaps act as an honest broker in such matters.

Dear staff, management and colleagues, it is an appropriate time to remember Roosevelt when he said that “the only thing we have to fear is fear itself” and so, repeating what we have said in may other occasions, we have to find ways of helping the Knowledge Bank evolve into the Wisdom Bank or, more humbly, the Common Sense Bank.

Thank You

Oral Statement:

Mr. Chairman, although we already made a written statement, there are some brief comments that I wish to make in order to better illustrate our concerns, so please bear with me.

In Supplement 2, the Survey of Country Experiences, I believe that it is quite illustrative, that in the very, very first example listed: “After identifying the following problems: weak credit culture with a prevalence of nonpayment mechanisms that undermine the development of the formal financial sector; limited access to formal, affordable finance by small and medium enterprises; and the slow pace of banking sector consolidation”, the only recommendation put forward to the country in that example are: “enhancement of central bank’s ability to deal with involvement bank; strengthening of penalty provisions; and increase in minimal capital requirements.”

I don’t think that those are just the answers that should come from a development institution. We all know that risk aversion comes at a cost - a cost that might be acceptable for developed and industrialized countries but that might be too high for poor and developing ones. In this respect the Bank has the responsibility of helping developing countries to strike the right balance between risks and growth possibilities.

In this respect let us not forget that the other side of the Basel [Committee’s regulatory risk weighted capital requirements] coin might be many, many developing opportunities in credit foregone.

Why do I make these comments with such candor? Because personally I have been learning for many years the consequences of a financial puritanism that seems to be invading the world and that does not get the real culprits, either. In the specific case of my country [Venezuela] the commercial banks credit portfolio fell in real terms from about $16bn in 1982 to only about $4bn in 1997.

In such a scenario, to hear about Basel [Committee] and its regulations reminds one of the make up of an already rigor-morted corpse, although we must admit that in the case of this particular corpse, we should know that even almost six feet under, it has been able anyhow to generate surprisingly large profits. 

I am certain that funds invested in FSAPs are very well invested funds, as fully attests that all the countries in my constituency to have done it. Nonetheless, in the area of risk management of finance, it might be an appropriate time to remember Roosevelt and that the only thing we have to fear is fear itself.

And so, repeating what I have said on some other occasion in this particular respect, I believe that we truly have to find a way of helping the Knowledge Bank to try to evolve into something more of a Wisdom Bank, or, to put it more humbly, at least a “common sense Bank.

Lets start by making sure these Financial Sector Assessment Programs are true development tools. In this respect I would really like to make a brief reference to the issue of collaboration with the Fund. I think this is a particularly clear case that shows where the collaboration should perhaps not be that intense, because as a development unit, we have to look at the growth potential of the sector, the development side, and they probably have to look at the safety side. And it is between this type of balance and continuing balance that we can really assist.

Finally on a related issue, last week in a seminar on housing finance we heard that Basel is getting to be a big rulebook—this was said by the Bank. And, to tell you the truth, the sole chance the world has of avoiding the risk that Bank Regulators in Basel, accounting standard boards, and credit-rating agencies will introduce serious and fatal systemic risks into the world, is by having an entity like the World Bank stand up to them—instead of rather fatalistically accepting their dictates and duly harmonizing with the International Monetary Fund.

As an example the Bank has for some time unsuccessfully been trying to argue with the accounting boards that, following their current rulings is not the best way of reflecting the Banks’ own financial reality. Well if the Bank has difficulties, imagine the rest of the world.

Thank you.

PS. Are the bank regulations coming from Basle good for development?

The document that I presented at the High-level Dialogue on Financing for Developing at the United Nations, New York, October 2007