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June 2013

More and better financial tools, fewer financial crises: The role of the financial system in managing risk

Martin Melecky's picture

Only by providing useful risk-managing tools and keeping its house in order, can the financial system fulfill its socially beneficial risk management function. Through the provision of useful financial tools, the financial system can shield people from bad shocks, and better position them to pursue opportunities. However, if the financial system fails to manage the risk it retains, it can also hurt people directly by hindering access to finance or indirectly by hampering refinancing of enterprises and straining public finances, and thus make people lose jobs, income, or wealth.

Public policy can stimulate the financial system to broaden the share of people with access to financial services (financial inclusion), so more people have more and better financial risk management tools. It can also promote measures to better control the risk that affects the whole financial system and foster financial stability. However to succeed on both fronts, the World Development Report 2014, in its chapter on the financial system, argues that public policy must take into account the trade-offs and synergies in the financial sector. The first step to balanced and successful policies is to establish an institutional framework that brings together policymakers and experts from the financial industry and academia.

I elaborate on this idea in subsequent paragraphs and encourage interested readers to pick up WDR 2014, in particular its chapter on the financial system, to learn more about the background and justifications for this proposal.

Finance and Poverty: Evidence from India

Thorsten Beck's picture

The relationship between finance, inequality and poverty is a controversial one. While some observers attribute not only the crisis but also rising inequality in many Western countries to the rise of the financial system (e.g. Krugman, 2009), others see an important role of the financial sector on the poverty alleviation agenda (World Bank, 2008). But financial sector policies are not only controversial on the macro, but also micro-level. While increasing access to credit services through microfinance had for a long time a positive connotation, this has also been questioned after recent events in Andhra Pradesh, with critics charging that excessive interest rates hold the poor back in poverty. In recent work with Meghana Ayyagari and Mohammad Hoseini, we find strong evidence for financial sector deepening having contributed to the reduction of rural poverty rates across India by enabling more entrepreneurship in the rural areas and by enticing inter-state migration into the tertiary sector.

Mobile Banking: Who is in the Driver’s Seat?

Amin Mohseni-Cheraghlou's picture

It is in the popular perception that technological availability and regulation are the two most important factors in promoting mobile banking, defined here as the usage of mobile phones to send/receive money and to make payments. Two cases, however, defy this common perception and bring forth interesting questions as to what are the main driving factors for mobile banking. Let’s take a brief look at Russia and Somalia.

  Russia and Somalia (2011)

Foreign banks in Mexico: is there a reason to worry?

There has been an ongoing debate regarding the consequences of foreign ownership in the banking sector in Mexico. Some participants in the public discourse argue that foreign ownership earnings leave the country in the form of dividends, leaving little, if any, for reinvestment. Another argument claims that foreigners are not interested in economic development in the country and thus restrict credit, especially to small and medium-size companies.

In this study (read Spanish version), we first analyze the theoretical underpinnings. According to Becker’s theory of discrimination, if one entity were to discriminate, the competition would take advantage of the money left on the table and would eventually take the discriminating entity out of the market or, at least, the entity would show subpar performance. In other words, discrimination in giving credit in the country would go against the best interests of the foreign-owned bank.