Financial Institutions and Market (Direct State Intervention)

2. Welcome

3. International Islamic University, Islamabad
Faculty of Management Science
Direct State Intervention
Chapter Four

4. Ziarmal
Ahmed Bilal
Hameedullah
 Mohammad Yousuf
Farmanullah
Ghowsodin Haidari

5.  Introduction
 Ownership Structure around the World
 Role of Government Bank Lending in Mitigating Economic
Cycle and Crisis.
 Long Run Impact of Government Bank Ownership.
 Government Intervention in Credit Market beyond Bank
Ownership.

6.  State own banks were created for two purposes
 Filling the market gaps
 Giving access to finance for SMEs
• Different strategies were followed by different countries
 China , Germany , brazil used their state own banks to
step up financing to private sector
 Korea , Malaysia ,Netherlands ,Canada ,Chile relied
heavily on credit guaranty programs
 UK and USA followed unconventional monitory and
fiscal policy

7.  Debate was started whether there is a need for
direct government intervention or not
 One group was in the favor of direct government
intervention
 One group was against direct government intervention
• the main summary of this chapter is
• Lending by state owned banks are less procyclical
• Focusing in the governance of these banks may help that what are
inefficiencies with these banks
• The credit guarantee schemes were also a popular intervention tool

8.  State owned banks have the whole banking asset
before crisis :
 Developed economies 6.7% of GDP
 Developing economies 20.5%
After crisis
 Developed economies 8% (bailouts ,recapitalization ,
nationalization )
 Developing economies 17.3% (massive privatization )
• In Europe and central Asian countries decreased from88% in
1985 to 20% 2009 due to privatization
• African banks have highest share of foreign banks
• Eastern Europe has less than 5%

9.  To stable aggregate credit.
 According to Bigg , mayor credit recovery may result in economic
recovery 2010.
 In 2008 and 2009 more than 80% of countries felt recessionary
situation in real output in also decrease in credit.
 Credit stabilization by state banks is due to several reasons:
1: maybe part of their mandate to fill market gaps
2: maybe perceive saver during recession and crisis and their
strong base allow them lending during the crisis.
 In Canada, Chile Korea government injected capital in their state
own banks in order to give access to finance to SMEs and
exporting farms.
 In India and Tunisia government established credit facilities for
banks

10.  The government use its state own banks to play countercyclical
in financial crisis.
 Liquidity assistance line was created to in order to enable state
commercial banks like BB and CEF to take interest ownership of
some public and private institutions.
 BB CEF and state own banks were used to play countercyclical.
 Lending by state own banks increased from 13.4% of GDP to
18.1% of GDP in 2009 and in 2011 it was 20.1% from 49.1% of all
lending.
 BNDES extended special credit facilities like credit was given at
subsidize less than 6% which was 7.5% less than market price
resource were channel from treasury bonds instead of WAT
 BNDS credit distribution

11. Before Crisis After Crisis
 According to research Lending by BNDS is according
to political view of public lending

12.  Mexican development banks expanded credit to private
farms and non-bank financial institutions with the
conditions to refinance the debt into declaration in their
lending
 Despite their strong lending expansion their relative share
remand lower than 2006 level of private banks.
 Mexican DBs were credited for restoring operation in key
markets with CGS which was increase by 6.1 billion dollars
 NPLs remand at 1.1% relative to 3% of private banks.
 So overall Mexican DBS played countercyclical role during
financial crisis.

13.  Poland was the only country in which avoid recession
due to timely safety measures
 NBP and PKOPOLCKY expanded credits during
financial crisis
 PKOBP give credit it faster pace then foreign banks
 PKO lending increase from 15.6% of GDP in 2008 to
17.2% in 2010
 Four reasons of PKO credit expansion compared to
foreign bank

14.  To create attractive business opportunities .
 PKO lending was supported by government .
 PKOs conservative structure reduced its dependents on
domestic and abroad financing .
 Its adequacy ratio was more than 8% of regulatory ratio.
 PKO played of sitting credit decline by foreign banks.

15.  Two views about the role of government owned banks
 Franklin Allen professor in university of Pennsylvania who
give the first view about the role state own banks in
promoting financial stability he was in the favor of direct
government intervention which is also know development
view this view is associated with according to him
government banks can play important role in countries
where economic institutions are not very developed where is
capital scares and public distrust
 They think that government is in a better position to control
the aggregate credit and they can provide some special crisis
management tools to overcome financial crisis

16.  Charles calomiris professor at Colombia university give
the second view about the role of state own banks which is
also called Political view
 argued that government do not have enough incentive to
take socially desirable investment ,provide subsidize and
employment they were thinking that it may create agencies
problems and also the gov banks are not good trained in
credit analysis like private banks they may also create
corruption and misallocation of resources

17.  Macroeconomic Evidence on the Impact of
Government Bank on Credit and Output Cycle
 Caldern (2012) aggregate credit cycles are deeper in
financial system of countries with high participation of
government state owned banks.
 Credit contraction are twice as deep in country with
GOBs as compare to low GOBs.
 Credit recoveries in countries with high GOBs has faster
and stronger rebound effect as compared low GOBs.
 In countries with high GOBs the credit per capita
fluctuates more in recoveries that follow crisis in
recession.

18.  Canada, Chile, Malaysia, Netherland, Finland, France,
Germany, Greece, UK, Japan and others introduced
CGS to give access to finance for SMEs.
 They refueled new credit and extended new schemes
to remove the credit crunch on SMEs.
 CGS serves as mechanism of diversification and
transfer of risk.
 Honohan (2010) CGS can emerge due to for three
reason.
 To less asymmetric information
 To diversify and spread risk
 To exploit the regulatory arbitrage

19.  CGS were used to achieve:
 Economic additionally
 Financial additionally
 CGS is not real countercyclical tool they have unlikely more
macroeconomic effects
 Philippine: credit were given to those who really don’t
needed it.
 Pakistan: subsidize credit were given to exporters who
really don’t needed fund.
 Back: 49% of 70% CGS is funded by government and 20% is
managed by government also 10% of risk assessment and
recovery.
 CGS is used in both developed and developing countries.