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Alternative frameworks for providing financial services

Author

Listed:
  • Claessens, Stijn
  • Klingebiel, Daniela

Abstract

Drawing on country experience, the authors analyze alternative frameworks for providing financial services. Scope of permissible activities: The integrated banking model (commercial banking fully integrated with other financial services, including investment banking) benefits both financial institutions and consumers. Potential costs, such as extending the safety net to non-deposit financial services, can be mitigated with safeguards and firewalls, which require regulatory enforcement and monitoring. Internationally, countries are moving toward the integrated model. The wider scope of services appears to improve financial stability and mitigate the risk of a banking crisis. Degree of competitiveness and contestability (openness to competition): Competitiveness need not only require many financial institutions; a concentrated system can be competitive if contestable. Allowing the liberal entry of foreign banks lowers the franchise value of (domestic) institutions, but the evidence suggests that on balance foreign entry provides important benefits. Systems should not be over-competitive, however. They should allow enough franchise value that future profits give institutions an incentive to behave prudently. Design of safety net: the design of the safety net is important in the tradeoff between ensuring the safety and soundness of financial institutions and allocating resources efficiently. A well-functioning safety net minimizes regulatory forbearance and gives banks incentives to act prudently. Owners of financial institutions behave more prudently if they have much at risk, in the form of capital, future expected profits, or their own jobs. The wrong safety net, especially the wrong deposit insurance, entails great moral hazard. Large deposit holders are more likely to provide market discipline if they are not covered by deposit insurance (explicit or implicit), if disclosure is extensive, and if the accounting framework is adequate. Supervision: Best international practice suggests that supervision of the financial conglomerate should probably be consolidated in one agency. Supervisors should have incentives both to monitor and to take appropriate action. Supervisory salaries should be sufficient, relative to those in the private sector, to attract and retain competent and motivated staff.

Suggested Citation

  • Claessens, Stijn & Klingebiel, Daniela, 1999. "Alternative frameworks for providing financial services," Policy Research Working Paper Series 2189, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2189
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Mattoo, Aaditya & Rathindran, Randeep, 2006. "Measuring Services Trade Liberalization and Its Impact on Economic Growth: An Illustration," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 21, pages 64-98.
    2. Chisari, Omar O. & Ferro, Gustavo, 2009. "Gobierno Corporativo: los problemas, estado actual de la discusión y un ejercicio de medición para Argentina
      [Corporate Governance: the problems, the current stage of the discussion and a measureme
      ," MPRA Paper 15630, University Library of Munich, Germany.
    3. Thomas C. Glaessner & Tom Kellermann & Valerie McNevin, 2004. "Electronic Safety and Soundness : Securing Finance in a New Age," World Bank Publications, The World Bank, number 15029, April.

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