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State Financial Institutions: Can They Be Relied on to Kick-Start Lending?

Editor's Note: Heinz P. Rudolph is a senior financial sector specialist in the Financial and Private Sector Development Vice Presidency of the World Bank Group.

This is the 12th in a series of policy briefs on the crisis—assessing the policy responses, shedding light on financial reforms currently under debate, and providing insights for emerging-market policy makers.

The need to kick-start lending to the real sector in response to the global financial crisis is leading many countries to expand the role of state-owned financial institutions. The effectiveness of the support by these institutions depends in large part on the nature of the shock, on their ability to leverage private commercial banks to scale up their impact, and on the existence of a sound institutional framework.

While it is too early to evaluate their effectiveness, past experience with the use of such institutions is sobering. Whether countries will heed the lessons of this experience remains to be seen.

Click here to read the policy note in full.

Comments

A dollar spent by a bureaucrat is a dollar spent but a dollar lent by a banker does not necessarily mean a dollar spent. I believe that allowing the private banks to help out the economy by lowering their capital requirements now, even at the risk of more bailouts tomorrow, is better than having government bureaucrats do the lending or decide on fiscal spending.

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