Global Financial Development RepoRt
Rethinking the
Role of the State in Finance
2013
Rethinking the Role of the State in Finance
Global Financial
Development RepoRt
2013
Global Financial Development Report 2013 is the first in a new World Bank series. It provides a unique contribution to financial
sector policy debates, building on novel data, surveys, research, and wide-ranging country experience, with emphasis on
emerging-market and developing economies.
The global financial crisis has challenged conventional thinking on financial sector policies. Launched on the fourth
anniversary of the Lehman Brothers collapse—a turning point in the crisis—this volume re-examines a basic question: what is
the proper role of the state in financial development? To address the question, this report synthesizes new and existing evidence
on the state’s performance as financial sector regulator, overseer, promoter, and owner. It calls on state agencies to provide
strong regulation and supervision and ensure healthy competition in the sector, and to support financial infrastructure, such as
the quality and availability of credit information. It warns that direct interventions—such as lending by state-owned
banks, used in many countries to counteract the crisis—may end up being harmful.
The report also tracks financial systems in more than 200 economies before and during the global financial crisis. Accompany-
ing the publication is a website (http://www.worldbank.org/financialdevelopment) that contains extensive datasets, research
papers, and other background materials, as well as interactive features.
The report’s findings and policy recommendations are relevant for policy makers; staff of central banks, ministries of finance,
and financial regulation agencies; nongovernmental organizations and donors; academics and other researchers and analysts;
and members of the development community.
ISBN 978-0-8213-9503-5
SKU 19503

Rethinking the
Role of the State in Finance

GLOBAL FINANCIAL DEVELOPMENT REPORT 2013

official World Bank translation. The World Bank shall not be liable for any content or error in this
translation.
All queries on rights and licenses should be addressed to the Office of the Publisher, The World Bank,
1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank
.org.
ISBN (paper): 978-0-8213-9503-5
ISBN (electronic): 978-0-8213-9504-2
DOI: 10.1596/978-0-8213-9503-5
ISSN: 2304-957X
Cover photos: Shutterstock
Cover design: Naylor Design
Contents
GLOBAL FINANCIAL DEVELOPMENT REPORT 2013 v
Contents
Foreword xi
Preface xiii
Acknowledgments xv
Abbreviations and Glossary xix
Overview 1
1 Benchmarking Financial Systems around the World 15
2 The State as Regulator and Supervisor 45
3 The Role of the State in Promoting Bank Competition 81
4 Direct State Interventions 101
5 The Role of the State in Financial Infrastructure 129
Statistical Appendix 161
References 175
GLOBAL FINANCIAL DEVELOPMENT REPORT 2013 v
vi CONTENTS GLOBAL FINANCIAL DEVELOPMENT REPORT 2013
BOXES
O.1 Main Messages of This Report 2

Output Cycles 113
4.6 Two Views on the Role of State-Owned Banks 116
4.7 Development Banks: What Do We Know? What Do We Need to Know? 120
5.1 Argentina: Using Credit Registry Information for Prudential Supervision 138
5.2 Egypt: Removing Regulatory Barriers to the Development of a Private
Credit Bureau 140
5.3 Monopoly Rents, Bank Concentration, and Private Credit Reporting 141
5.4 Mexico: State Interventions to Prevent Market Fragmentation and Closed
User Groups 143
5.5 Morocco: Public Support for the Development of a Private Credit Bureau 145
5.6 Reforming Large-Value Payment Systems to Mitigate Systemic Risk 151
5.7 Italy: Reviving Interbank Money Markets through Collateralized Transactions 156
FIGURES
O.1 Benchmarking Financial Development, 2008–10 6
O.2 Selected Features That Distinguish Crisis-Hit Countries 9
O.3 Market Power and Systemic Risk 10
O.4 Change in Bank Lending Associated with a 1% Increase in GDP Per Capita 12
O.5 Credit Reporting vs. Banking System Concentration 14
1.1 Financial Depth and Income Inequality 20
1.2 Socioeconomic Development, Financial Development, and Enabling
Environment 21
1.3 Correlations between Characteristics in Same Category (example) 25
1.4 Correlations among Financial System Characteristics 31
1.5 Financial System Characteristics, by Income Group, 2010 34
1.6 The Uneven Nature of Financial Systems (Illustration) 35
1.7 Financial Systems: 2008–10 versus 2000–07 (Financial Institutions) 36
1.8 Financial Systems: 2008–10 versus 2000–07 (Financial Markets) 37
B1.3.1 The Chinese Financial Sector 38
B1.4.1 Romania’s Financial Sector 40
viii CONTENTS GLOBAL FINANCIAL DEVELOPMENT REPORT 2013

GLOBAL FINANCIAL DEVELOPMENT REPORT 2013 CONTENTS ix
5.1 The Development of Credit Reporting Institutions, 1980–2012 134
5.2 Prevalence of Credit Reporting by Income Group 135
5.3 The Reach of Credit Reporting: Who Contributes Information? 135
5.4 The Depth of Credit Reporting: What Information Is Collected? 136
5.5 GDP Turnover of Large-Value Payment Systems by Region, 2009 149
5.6 The Adoption of Real-Time Gross Settlement Systems over Time, 1990–2010 150
5.7 Sources of Intraday Liquidity for Participants of
Real-Time Gross Settlement Systems 153
5.8 Interbank Money Market Rates in the United States
and United Kingdom 154
5.9 Interbank Money Market Rates in Emerging Markets 155
B5.7.1 Interbank Rates in the Italian Collateralized Money Market (MIC) and Other
Segments of the Euro Money Market 156
B5.7.2 Outstanding Volumes and Average Maturity Trend on the MIC 157
MAPS
B2.2.1 Coverage of the 2011 Bank Regulation and Supervision Survey 56
5.1 Credit Information Systems around the World 133
A.1 Depth—Financial Institutions 167
A.2 Access—Financial Institutions 168
A.3 Efficiency—Financial Institutions 169
A.4 Stability—Financial Institutions 170
A.5 Depth—Financial Markets 171
A.6 Access—Financial Markets 172
A.7 Efficiency—Financial Markets 173
A.8 Stability—Financial Markets 174
TABLES
1.1 Stylized 4x2 Matrix of Financial System Characteristics (with examples of
candidate variables in each category) 23
1.2 Financial System Characteristics: Summary 33

hard-won development gains among the most
vulnerable.
Fostering sustainable financial develop-
ment and improving the performance of
financial systems depends on numerous insti-
tutional factors and stakeholders. The policy
maker, the regulator, the banker, and the
financial consumer must all play their part.
The World Bank Group has been actively
engaged in financial sector work for some
time, aiming to help various parts of the insti-
tutional mosaic—including regulation and
supervision, corporate governance, and finan-
cial infrastructure—ensure that the financial
sector contributes meaningfully to strong and
inclusive growth. This report seeks to advance
the global financial sector policy debate,
highlighting the important perspective of
emerging markets and developing economies.
It contains a rich array of new financial sector
data that are also publicly available as part of
our Open Data Agenda.
Sharpening the focus on the central role of
finance in socioeconomic development and
understanding how financial systems can be
strengthened are crucial if we are to realize
our goal of boosting prosperity and eradi-
cating poverty. The Global Financial Devel-
opment Report is an important step in this
process.

national Monetary Fund have also provided
valuable contributions.
The report benchmarks financial institu-
tions and markets around the world, rec-
ognizing the diversity of modern financial
systems. In its analysis of the state’s role in
finance, the report seeks to avoid simplistic,
ideological views, instead aiming to develop
a more nuanced approach to financial sec-
tor policy based on a synthesis of new data,
research, and operational experiences.
The report emphasizes that the state has a
crucial role in the financial sector—it needs to
provide strong prudential supervision, ensure
healthy competition, and enhance financial
infrastructure. Regarding more direct inter-
ventions, such as state ownership of banks,
the report presents new evidence that state
involvement can help in mitigating adverse
effects of a crisis. However, the report cau-
tions that over longer periods, direct state
involvement can have important negative
effects on the financial sector and the econ-
omy. Therefore, as crisis conditions recede,
the evidence suggests that it is advisable for
governments to shift from direct to indirect
interventions.
Because the financial system is dynamic
and conditions are constantly changing, regu-
lar updates are essential. Hence, this report

presidencies, the Poverty Reduction and Eco-
nomic Management Network, and External
Affairs, as well as staff of the International
Finance Corporation (IFC).
Aslı Demirgüç-Kunt was the director of
this project. Martin C
ˇ
ihák led the core team,
which included Cesar Calderón, Martin
Kanz, Subika Farazi, and Mauricio Pinzon
Latorre. Other key contributors were Erik
Feyen (chapter 1); Maria Soledad Martínez
Pería (chapters 2, 3, and 4); I
˙
nci Ötker-Robe,
Martín Vázquez Suárez, Miquel Dijkman,
Valeria Salomao Garcia, R. Barry Johnston,
and Nicolas Véron (chapter 2); Thorsten Beck
and Klaus Schaeck (chapter 3); Marcin Piat-
kowski, Eva Gutierrez, José De Luna Mar-
tinez, Carlos Leonardo Vicente (chapter 4);
Ouarda Merrouche, Miriam Bruhn, Mas-
simo Cirasino, Marco Nicoli, Maria Teresa
Chimienti, Froukelien Wendt, Luchia Marius
Christova, Margaret Miller, Leora Klapper,
Shalini Sankaranarayan, Alban Pruthi, and
Thilasoni Benjamin Musuku (chapter 5).
The report was prepared under the over-
sight of Janamitra Devan, Vice President
(FPD and IFC); Justin Yifu Lin, Chief Econo-

Mauricio Pinzon Latorre and Subika
Farazi were instrumental in compiling and
updating the databases underlying the report.
In so doing, they benefited from the work of
the current FinStats database team, which
includes Katie Kibuuka and Diego Sour-
rouille, who in turn relied on key efforts from
previous FinStats team members, including
Ed Al-Hussainy, Haocong Ren, and Andrea
Coppola. Joanna Nasr, Mariana Carvalho,
and Zarina Odinaeva helped with the data
on the credit information systems used in
chapter 5.
The work on the 2011 update of the
Banking Regulation and Supervision Survey
started with the collaboration of Maria Sole-
dad Martínez Pería, Roberto Rocha, Con-
stantinos Stephanou, and Haocong Ren. The
survey benefited from contributions from
numerous banking regulation experts in the
World Bank, including David Scott, Krish-
namurti Damodaran, Katia D’Hulster, Ced-
ric Mousset, and others outside the World
Bank, in particular, Michael Andrews and
Jan-Willem van der Vossen. Insights and
encouragement from Gerard Caprio, Ross
Levine, and James Barth, who organized
the previous rounds of the survey, are grate-
fully acknowledged. PKF (UK) and Auxilium
helped with compiling and following up on

ert Cull, Stefano Curto, Mansoor Dailami,
Katia D’Hulster, Maya Eden, Tilman Ehr-
beck, Matthias Feldmann, Aurora Ferrari,
Manuela Ferro, Jose Antonio Garcia, Egbert
Gerken, Swati Ghosh, David Gould, Neil
Gregory, Mario Guadamillas, Pankaj Gupta,
Mary Hallward-Driemeier, Darrin Hartzler,
Richard Hinz, Mustafa Zakir Hussain, Sujit
Kapadia, Isfandyar Khan, Thomas Kirch-
meier, Kalpana Kochhar, Rachel Kyte, Jeffrey
Lewis, Samuel Maimbo, Mariem Malouche,
Cledan Mandri-Perrott, Claire Louise
McGuire, Martin Melecky, Dino Merotto,
Sebastian Molineus, Fredesvinda Montes,
Cedric Mousset, Nataliya Mylenko, Makoto
Nakagawa, Harish Natarajan, Aloysius Uche
Ordu, Jorge Patiño, Jean Pesme, Tigran Pog-
hosyan, John Pollner, Daniel Pulido, Hao-
cong Ren, Ivan Rossignol, Heinz Rudolph,
Consolate Rusagara, Andre Ryba, David
Scott, James Seward, Sophie Sirtaine, Con-
stantinos Stephanou, Mark Stone, Vijay Tata,
Marilou Uy, S. Kal Wajid, Juan Zalduendo,
Laura Zoratto, and participants in seminars
and briefings organized at the World Bank.
The report would not be possible with-
out the production team, including Merrell
Tuck-Primdahl and Nicole Frost, as well as
Stephen McGroarty, Santiago Pombo, Jose
De Buerba, Jane Zhang, Ryan Hahn, Mary

Gerard Caprio William Brough Professor of Economics and Chair, Center for
Development Economics, Williams College
Stijn Claessens Assistant Director, Research Department, International Monetary Fund
Patrick Honohan Governor, Central Bank of Ireland
R. Barry Johnston Former Assistant Director, Monetary and Capital Markets
Department, International Monetary Fund
Ross Levine James and Merryl Tisch Professor of Economics; Director, William R.
Rhodes Center for International Economics and Finance, Department
of Economics, Brown University
Monica Rubiolo Head of Macroeconomic Support, State Secretariat for Economic
Affairs, Switzerland
Klaus Schaeck Professor of Empirical Banking, Bangor University
Nicolas Véron Senior Fellow, Bruegel Institute; Visiting Fellow, The Peterson Institute
for International Economics
The report also benefited from suggestions and insights from country officials and other
experts participating in the Financial Development Barometer and the other surveys and dis-
cussions underlying this report. The findings, interpretations, and conclusions expressed in this
report do not necessarily reflect the views of the advisers or institutions with which they are
affiliated.
xviii ACKNOWLEDGMENTS GLOBAL FINANCIAL DEVELOPMENT REPORT 2013
PEER REVIEWERS
Stijn Claessens Assistant Director, Research Department, International Monetary Fund
Augusto de la Torre Chief Economist, Latin America and the Caribbean Vice Presidency,
World Bank
Ross Levine James and Merryl Tisch Professor of Economics; Director, William R.
Rhodes Center for International Economics and Finance, Department of
Economics, Brown University
Norman Loayza Lead Economist and Director, 2014 World Development Report: Risks,
Vulnerabilities, and the Crisis, World Bank
Roberto Rocha Senior Adviser, Financial and Private Sector Vice Presidency, World

DTAs deferred tax assets
EAP East Asia and Pacific
ECA Europe and Central Asia
EMDEs emerging markets and
developing economies
e-MID Electronic Market for Interbank
Deposit
FIRA Fideicomisos Instituidos en
Relación con la Agricultura,
Mexico
FIRST Financial Sector Reform and
Strengthening Initiative
FOGAPE State-Owned Guarantee Fund
for Small Entepreneurs, Chile
FSA Financial Sector Assessment
FSAP Financial Sector Assessment
Program
FSB Financial Stability Board
FSSA Financial System Stability
Assessment
GCC Gulf Cooperation Council
GDP gross domestic product
GOB government-owned bank
GTS global trading system
HHI Herfindahl-Hirschman index (of
market concentration)
IDB Inter-American Development
Bank
IFC International Finance
Corporation

sarily a state as understood by international law and practice).
PKO BP PKO Bank Polski
PRISM Pakistan Real Time Interbank
Settlement Mechanism
PSEFT Payment System and Electronic
Fund Transfer
PwC Pricewaterhouse Coopers
RCCP Recommendations for Central
Counterparties
ROA return on assets
RSSS Recommendations for Securities
Settlement Systems
RTGS real-time gross settlement
RWA risk-weighted assets
SAR Special Administrative Region
SBP State Bank of Pakistan
SECO State Secretariat for Economic
Affairs, Switzerland
SELIC Sistema Especial de Liquidação
e de Custódia
SIFIs systemically important financial
institutions
SME small and medium enterprise
SSA Sub-Saharan Africa
STR Sistema de Transferência de
Reservas
TA/A taxes to assets
KfW Kreditanstalt für Wiederaufbau,
Germany
KOTEC Korean government guarantor

this global crisis and those in recent decades is
that developed economies were affected much
more strongly and more directly than were
developing economies. But some developed
financial systems (such as those of Australia,
Canada, and Singapore) have shown remark-
able resilience so far, while some developing
ones have been brought to the brink of col-
lapse. The bigger point is that the quality of
a state’s policy for the financial sector mat-
ters more than the economy’s level of devel-
opment. This report reassesses the role of the
state in finance, based on updated data, ongo-
ing research, and World Bank Group experi-
ences from around the world.
Two building blocks underlie the report’s
view of the role of the state in finance. First,
there are sound economic reasons for the
state to play an active role in financial sys-
tems. Second, there are practical reasons to
be wary of the state playing too active a role
in financial systems. The tensions inherent in
these two building blocks emphasize the com-
plexity of financial policies. Though econom-
ics identifies the social welfare advantages of
O

n September 15, 2008, the failure of
the U.S. investment banking giant
Lehman Brothers marked the onset of the larg-

for policy makers from a variety of experi-
ences and analyses (see box O.1 for a sum-
mary of the main messages).
The state tends to play a major role in
the modern financial sector, as promoter,
certain government interventions, practical
experience suggests that the state often does
not intervene successfully. Furthermore, since
economies and the state’s capacity to regu-
late differ across countries and over time,
the appropriate involvement of the state in
the financial system also varies case by case.
BOX O.1 Main Messages of This Report
The report’s overall message is cautionary. The global
financial crisis has given greater credence to the idea
that active state involvement in the financial sector
can help maintain economic stability, drive growth,
and create jobs. There is evidence that some interven-
tions may have had an impact, at least in the short
run. But there is also evidence on potential longer-
term negative effects. The evidence also suggests that,
as the crisis subsides, there may be a need to adjust
the role of the state from direct interventions to less
direct involvement. This does not mean that the state
should withdraw from overseeing finance. To the con-
trary, the state has a very important role, especially in
providing supervision, ensuring healthy competition,
and strengthening financial infrastructure.
Incentives are crucial in the financial sector. The
main challenge of financial sector policies is to better

restricting competition, it is necessary to address
distorted competition, improve the flow of informa-
tion, and strengthen the contractual environment.
Lending by state-owned banks can play a positive
role in stabilizing aggregate credit in a downturn, but
it also can lead to resource misallocation and dete-
rioration of the quality of intermediation. The report
presents some evidence that lending by state-owned
banks tends to be less procyclical and that some
state-owned banks even played a countercyclical role
during the global financial crisis. However, the track
record of state banks in credit allocation remains gen-
erally unimpressive, undermining the benefits of using
state banks as a countercyclical tool. Policy makers
can limit the inefficiencies associated with state bank
credit by paying special attention to the governance
of these institutions and schemes and ensuring that
adequate risk management processes are in place.
However, this oversight is challenging, particularly in
weak institutional environments.
Experience points to a useful role for the state in
promoting transparency of information and reducing
counterparty risk. For example, the state can facili-
tate the inclusion of a broader set of lenders in credit
reporting systems and promote the provision of high-
quality credit information, particularly when there
are significant monopoly rents that discourage infor-
mation sharing. Also, to reduce the risk of freeze-ups
in interbank markets, the state can create the condi-
tions for the evolution of markets in collateralized

cial fragility. Also, authorities can regulate
information disclosure to facilitate sound
decisions, and even regulate financial prod-
ucts, similar to how governments regulate
the sale of food and drugs. Thus, economics
provides many reasons for an active role of
the state in finance.
But just because the state can ameliorate
market imperfections and improve the oper-
ation of financial systems does not mean that
it will. Designing and enforcing appropriate
policy can be tricky. Returning to the previ-
ous analogy with speed limits for cars and
trucks, having a single speed limit may not
seem very effective, because some vehicles
have better safety features, such as braking
systems, and therefore are less likely to end
up in a crash. If vehicles with better brakes
were allowed to go faster, they could spend
less time on the road, and traffic could ease
up. But brake quality is difficult to monitor
in real time. So, differentiated speed lim-
its can be difficult to design and enforce,
owner, regulator, and overseer. Indeed, eco-
nomics provides several good motivations
for an active role for the state in finance.
These motivations reflect the effects of “mar-
ket imperfections,” such as the costs and
uncertainties associated with (a) acquiring
and processing information, (b) writing and

the crash and very disruptive to traffic in gen-
eral. Nobody wants to be involved in a crash,
of course. But when deciding on how fast to
go, a car or truck driver may not fully con-
sider the costs that a crash might have on oth-
ers in terms of injuries, damages, time lost in
traffic jams, and so on. The state can play a
role, for example by imposing and enforcing
speed limits, and perhaps imposing stricter
regulation of vehicles that pose bigger risks,
such as large trucks.
Similarly, financial institutions often do
not bear the full risks of their portfolios.
When a large bank makes risky investments