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State role in stability, growth highlighted

September 16, 2012

ISLAMABAD, Sept 15: State involvement in the financial sector can help maintain economic stability, drive growth and create jobs, says Global Financial Development Report 2013 compiled by the World Bank.

The World Bank emphasised the role of states in the financial sector to enable governments promote transparency and competition when crises erupt. It is time to rethink the role of the state in the financial sector.

The Global Financial Development Report: Rethinking the Role of the State in Finance, examines how financial systems around the world fared during the global financial crisis.

Coinciding with the anniversary of the 2008 collapse of Lehman Brothers, the report draws on several new global surveys and compiles unique country-level data covering more than 200 economies since the 1960s.

The report noted that the national payment system (NPS) in Pakistan has undergone major reforms during the past five years under the strong leadership of State Bank.

This has been a complex project, comprising the modernisation of infrastructure for wholesale and retail payments, the modernisation of the legal and regulatory framework for payment systems and instruments, and the introduction of innovative solutions in the provision of payment services for under-served banking population, observes the World Bank report.

As an operator of the large-value system, the State Bank, during the reform process, paid increasing attention to the operational reliability and security of the Pakistan Real Time Interbank Settlement Mechanism (PRISM), fixing the security policies and operational procedures in a number of normative documents and instructions.

Business continuity-related activities for PRISM have been established and documented as well. Procedures are in place for periodic backing-up and storing of data.

A secondary processing site has been established, and full system recovery is expected in 30 minutes to four hours with no data loss.

In addition, the SBP has developed requirements and recommendations for system participants to have in place necessary business resumption and recovery tools, says the report.

The report says that the state needs to encourage contestability through healthy entry of well-capitalised institutions and timely exit of insolvent ones.

Lending by state-owned banks can play a positive role in stabilising aggregate credit in a downturn, but it also can lead to resource misallocation and deterioration of the quality of intermediation.

The World Bank’s new global survey suggests that non-crisis countries – those which did not have a banking crisis in 2007 through 2009 – had more stringent definition of capital levels, and less complex regulatory frameworks.

Non-crisis countries were also characterised by better quality of financial information – among other reasons, because they have relatively less generous deposit insurance coverage.

According to the report, state-owned banks account for less than 10 per cent of banking system assets in developed countries and double that share in developing economies. The uptick in the share of state-owned banks in developed countries may be attributed to the recent bailouts, mergers, recapitalisations, and nationalisation of distressed financial institutions that were more common among developed economies than developing economies.

The report says that though government bank ownership is more prevalent in developing world, it has declined considerably over time. Since the 1970s, the share of state-owned banks relative to the total assets of the banking system declined sharply in all emerging regions, from an average of 67 per cent in 1970 to 22 per cent in 2009.

The report called for reforming credit rating agencies by saying that such institutions have not met the expectations placed on them by investors and policy makers.

The global financial crisis has generated renewed interest in the use of information from national credit registries for prudential oversight and regulations.

Currently, financial regulators use data from credit registries primarily for the offsite monitoring of credit risks.