«Public Financial Institutions in Developed Countries—Organization and Oversight Lev Ratnovski and Aditya Narain WP/07/227 © 2006 International ...»
Increased disclosure may be another way to improve transparency. A lot of public financial institutions have simplified accounting and disclosure requirements, often rationalized as a means of reducing costly paperwork. However, the merits of such savings, compared to the costs of the opaque and unaccountable environment they contribute to, are questionable. For most surveyed public financial institutions, there is a clear need for greater disclosure of financial performance (including risk assessments) and of performance in meeting defined policy objectives.
E. Principles of Oversight
For the purpose of guiding policy-makers and supervisors in improving efficiency and reducing risks of public financial institutions, it would be most useful to have distilled best oversight practices. However the existing evidence and conceptual understanding of the functioning of public financial institutions seem to still be insufficient to formulate clear, unambiguous, and widely applicable best practices.
At present, there are two major suggestions on the dimensions of such best practices.
The Organization of Economic Development and Cooperation’s (2005) Guidelines for the
Corporate Governance of State-Owned Enterprises consists of six chapters, addressing:
1. An effective legal and regulatory framework
2. The state acting as a [responsible] owner
3. Equitable treatment of shareholders
4. Relations with stakeholders
5. Transparency and disclosure
6. The responsibilities of the board.
In Fiechter and Kupiec (2004), the authors outline ten Principles for the Effective Supervision of State-Owned Financial Institutions. The principles derive from the Basel Core Principles of Banking Supervision and emphasize the regulator’s independency, ability to oversee capital adequacy, disclosure, and risk-management practices, and enforce corrective measures if necessary.
The analysis of our sample suggests the following contributions to the development of future
best principles for the oversight of public financial institutions:
• The Principles need to reflect the substitutability between regulation / supervision and the corporate governance mechanism in controlling the performance of public financial institutions.
• The Principles need to put maximum emphasis on the transparency of public financial institutions, as this dimension seems both currently lacking and difficult to achieve due to limited market discipline.
particular, developing countries may benefit from keeping a more robust external regulation and supervision approach to public financial institutions in addition to strengthening governance mechanisms.
This paper studied a sample of 18 public financial institutions in developed countries. There are genuine financial market failures that public intervention may correct, and, indeed, there are some examples of well-designed public interventions. Yet, from this broad sample we have identified a number of concerns about the operations of public financial institutions.
(These results are based on generalization and should not be regarded as applying to all institutions in the sample.) Many of the studied public financial institutions in developed countries suffer from inefficiencies apparently stemming from the excessive scope of intervention. In some cases, their activities may be wasteful and distortionary, and even pose risks to the stability of the financial system. Explicit or implicit government guarantees constitute contingent public expenditures, and effectively transfer risks to the taxpayers. Some public financial institutions in the sample suffer from weak accountability and oversight arrangements, and their reforms may be compromised by pervasive entrenchment.3 These results give a further caution to developing countries wishing to expand public provision of financial services. In deciding on the scope of public involvement in financial markets, the reasons for actual or presumed credit market failures should be examined more closely. An analysis should focus on the possibilities of addressing them with more “marketfriendly” and long-term market development policies, such as better regulation, improved property rights, higher transparency, etc. In case of doubt, countries may be better off foregoing public development banks altogether, or at least should seek to minimize their scope. At the same time, more investment in the accumulation of evidence and formulation of best practices in the organization and oversight of public financial institutions seems warranted and necessary.
3 In addition to prudential and fiscal aspects discussed in this paper, the reliance on public banks may also have consequences for the conduct of monetary policy. When credit is intermediated under artificial (nonmarket) interest rates, this may hamper the normal transmission mechanism.
Claessens, Stijn and Enrico Perotti, 2005, “The links between finance and inequality:
channels and evidence,” World Development Report 2005 Background Paper.
Graham Review of the Small Firms Loan Guarantee, 2004, U.K. Treasury.
Fiechter, Jonathan and Paul Kupiec, 2004 “Principles for Supervision,” in Caprio et.al, eds.
The Future of State-Owned Financial Institutions, Brookings Institution, Washington, D.C.
Levine, Ross, 2005, “Finance and Growth: Theory and Evidence,” in Philippe Aghion and Steven Durlauf, eds. Handbook of Economic Growth, Elsevier Science: Amsterdam.
Marston, David and Aditya Narain, 2004 “Observations from an IMF Survey” in Caprio et. al, eds. The Future of State-Owned Financial Institutions, Brookings Institution, Washington, D.C.
OECD (2005) “Guidelines for the Corporate Governance of State-Owned Enterprises.”