Notes on Financial System Development and Political Intervention
The paper studies the impact of political intervention on a financial system that consists of banks and financial markets and develops over time. In this financial system, banks and markets exhibit three forms of interaction: they compete, they com...
| Main Authors: | , |
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2013
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2013/01/17206614/notes-financial-system-development-political-intervention http://hdl.handle.net/10986/13162 |
| Summary: | The paper studies the impact of
political intervention on a financial system that consists
of banks and financial markets and develops over time. In
this financial system, banks and markets exhibit three forms
of interaction: they compete, they complement each other,
and they co-evolve. Coevolution is generated by two new
ingredients of financial system architecture relative to the
existing theories: securitization and risk-sensitive bank
capital. The authors show that securitization propagates
banking advances to the financial market, permitting market
evolution to be driven by bank evolution, and market
advances are transmitted to banks through bank capital. Then
they examine how politicians determine the nature of
political intervention designed to expand credit
availability. The authors find that political intervention
in banking exhibits a U-shaped pattern, where it is most
notable in the early stage of financial system development
(through bank capital subsidy in exchange for state
ownership of banks) and in the advanced stage (through
direct lending regulation). Despite expanding credit access,
political intervention results in an increase in financial
system risk and does not contribute to financial system
evolution. Numerous policy implications are drawn out. |
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