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International Islamic University, Islamabad

Faculty of Management Science

Direct State Intervention

Chapter Four

ZiarmalAhmed BilalHameedullah Mohammad Yousuf FarmanullahGhowsodin Haidari

Presented by:

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.

Layout

State own banks were created for two purposesFilling 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 sectorKorea , Malaysia ,Netherlands ,Canada ,Chile

relied heavily on credit guaranty programsUK and USA followed unconventional monitory

and fiscal policy

Introduction

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

Cont….

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%

Ownership structure around the world

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

Role of government banks in mitigating economic cycle and crisis

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

Role of state banks in Brazil.

Before Crisis After Crisis

According to research Lending by BNDS is according to political view of public lending

Cont.…..

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.

Role of state banks in Mexico

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

Role of state banks in Poland

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.

CONT…..

Two views about the role of government owned banksFranklin 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

Long Run Impact of Government Bank Ownership

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

Cont…..

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.

Cont….

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

Government Intervention in Credit Market beyond Bank ownership

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.

Cont…

Thank You