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.