Transcript LAC7 - IEPE / CdG

Financial Development in LAC
The Road Ahead
2011 Regional Flagship Launch
Central Bank of Brazil
March 22, 2012
Chief Economist Office
Latin America and the Caribbean
The World Bank
0
Structure of the Report
 Financial development

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Frictions, failures, paradigms
Bright and dark sides
Patterns and paths
 Where does LAC stand?
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
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Domestic FD
Financial globalization
Financial inclusion
 Developmental issues
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The banking gap
The equity gap
Going long
Risk absorption by the state
 Prudential oversight
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Where is LAC?
The new agenda
• Macro-prudential policy
• Micro-systemic regulation
• Systemic supervision
Introduction
 Where does LAC stand with respect to financial development?

Financial deepening, irrespective of financial stability
 How is financial development related to financial globalization?

Use of international markets (offshorization)
 Basic trends here
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Latin America centered, with lessons and evidence on other EMs

Given time constraints, some scattered evidence presented

The report has many more details for the interested readers

Policy discussion
Introduction
 Bird’s-eye view, showing stock-taking exercise

Broad and systematic comparisons across selected countries and regions

Mostly over the past two decades
 Several comparisons shed new light to different observers
 Problem of benchmarking
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Before/after analysis?
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Developed countries? Which ones? US? Germany? Others non-core?
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Which regions and countries among developing ones?
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Which controls?
Introduction
 Focus on domestic financial development
 Compare to globalization process

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Essential given large extent of globalization
And nature of financial intermediation in integrated markets
 Focus on banks and capital markets (bond and equity markets)
 Main focus on firms, but shed light on borrowers and creditors
 Different indicators


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Standard (e.g., over GDP) and relative sizes of different markets
With and without controls
Indicators capturing the changing nature of financing
Illustrate issues like currency and maturity composition, liquidity,
concentration, firms’ access to finance
Summary of Findings



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Mixed, nuanced picture from all the data: no linear story
Financial systems developed over the last two decades
Also became significantly more complex
From a mostly bank-based model to a more complete and
interconnected model

Non-bank markets (bonds and equities) increased in absolute and
relative size
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New markets also developing
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Non-bank institutional investors now play more central role
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The number and sophistication of participants (including crossborder investors) increasing

Banks connected to capital markets and institutional investors
Summary of Findings
 Nature of financing also changing, slowly
 In general, towards the better

Increased maturity of bonds (both private and public sectors in domestic
and foreign markets)
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Decline in the extent of dollarization of loans and bonds
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Even some issues of local currency bonds in foreign markets
 Local developments paired by two-way internationalization
 Big chunk of globalization/offshorization happened in the 1990s
 But now, safer integration

EMs net creditors in debt and net debtors in equity
 Different stories for bond and equity markets

Bonds domestically and equity abroad
Summary of Findings
 Despite all new developments, large heterogeneity across
regions and countries
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

No convergence yet – advanced economies developed even more
Though different stories across regions, some general trends
Many of the improvements centered in certain areas, and countries
 Many shortcomings in several important EMs
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
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Bank credit stagnated in various countries
Firm financing from banks decreased in relative terms
Bond markets expanded, but with limitations
In banks and bonds, public sector still captures significant share
Equity markets still small, illiquid, and concentrated in large firms
Institutional investors sophisticated and large in several countries, but
with much more limited role than previously thought
Implications of Findings
 Far away from model of dispersed ownership and participation
 Supply versus demand effects

Constraints not on lack of available funds: domestic & foreign savers

Many assets available for investment not purchased by institutional
investors or foreigners, which hold large resources

Institutional investors seem to shy away from risk

Incentives to banks to move first into relatively easy markets (consumer,
leasing, services), after big corporations left to capital markets

Incentives to asset managers and the overall functioning of financial
systems does not contribute to expectations
Implications of Findings
 Many firms not becoming public or not accessing markets
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Capital markets service only few firms, with increasing concentration
domestically and abroad
Substantial financing through retained earnings and banks
 Regulations do not seem to be the main obstacle
 Several challenges ahead
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

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Growing savings
Role of financial intermediaries
Need for more risk taking paired with stability
Spillovers to all firms
Need to catch up
Complexities and interconnectedness
Structure of the Financial System
Relative Size: All Increased, But No Catch Up
Size of Domestic Financial System
Banks
Bonds
Equities
350%
300%
89%
250%
42%
97%
123%
51% 50%
Eastern
Europe (2)
2000-9
1990-9
2000-9
1990-9
2000-9
1990-9
2000-9
1990-9
Source: IFS, BIS, and WDI
China
20%
36%
0%
Asia (5)
32% 35% 28%
G7 (5)
20%
60%
India
22%
52%
43%
33%
80%
105%
59%
39% 44%
LAC7 (6)
60%
Oth. Adv.
Economies
(4)
73%
2000-9
13% 43%
128% 17%
59%
62%
31%
51%
1990-9
56% 13%
8%
83% 84% 95%
54%
92%
1990-9
36%
2000-9
50%
36%
104%
66%
1990-9
100%
77%
2000-9
150%
85%
66%
2000-9
200%
1990-9
% of GDP
69%
Brazil
Structure of Domestic Financial Systems
LAC7
140%
Househ.
10%
120%
% of GDP
100%
Equity
34%
Househ.
10%
Frgn.
57%
Equity
49%
80%
60%
Bonds
31%
Frgn.
48%
Corp.
77%
Corp.
65%
Banks
45%
Bonds
34%
Banks
41%
40%
20%
Banks
45%
Govt
35%
0%
Markets
Outstanding
Liabilities
IC 4%
MF 7%
PF
14%
Banks
41%
Govt
36%
Assets
Held
Markets
Outstanding
Liabilities
2000-2003
Source: Lane and Milesi-Ferretti (2007), IFS, BIS, WDI, EMBD, ICI, ASSAL, AIOS, and local sources
2004-2007
IC 5%
MF 9%
PF
19%
Assets
Held
Banks
Banks: Uneven Evolution
Private Bank Claims
1980-1989
1990-1999
2000-2009
140%
117%
120%
107%
100%
% of GDP
100%
93%
82%
80%
76%
71% 73%
72%
65%
58%
60%
44%
40%
40%
31%
34%
24%24%
23%
55%56%
38%
29%29%30%
20%
0%
Asia (5)
China
Eastern
Europe (3)
G7 (5)
India
LAC7 (6)
Oth. Adv.
Economies
(6)
Numbers in parentheses next to region names represent the number of countries included in the graphs.
Source: IMF’s IFS
Brazil
Banks: Relative Decline in Corporate Lending
Credit Composition
Commercial
Mortgage
Personal
100%
90%
17% 17% 18% 18%
22% 19%
19%
% of Total Credit
70%
37%
40%
51%
50%
14%
43% 47% 47%
34%
9%
8%
23%
24% 26%
80%
60%
9%
11% 10% 10% 14%
14%
10%
43% 43% 42%
32% 33%
5%
6%
49%
58%
40%
66%
30%
20%
49%
40%
31%
10%
41%
25%
34%
67%
62% 60%
63% 61%
48% 48% 50%
45% 42% 43%
China
Source: Local sources
Eastern Europe
(2)
G7 (2)
LAC7 (6)
Oth. Adv.
Economies (3)
Brazil
2008-09
2004-07
2000-03
2008-09
2004-07
2000-03
2008-09
2004-07
2000-03
2008-09
2004-07
2000-03
2008-09
2004-07
2000-03
2008-09
2004-07
2000-03
0%
Banks: Not Closing the Gap
Private Credit over GDP (Residuals)
50
40
30
20
10
0
-10
-20
Asia
Eastern Europe
G7
LAC-7
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
-40
1984
-30
Other Advanced Economies
Note: Controls used are GDP per capita, population size and density, young and old age dependency ratios, a financial offshore center dummy, a
transition country dummy, and a large fuel exporter dummy.
Retail Stores: Hold Significant Fraction of Debt
Consumer Debt in Chile
Banks
Retailers
Family Comp. Funds and Cooperatives
15%
15%
53%
17%
Source: Matus et al. (2010)
Others
Access: But Considerably More Expensive
Median Checking and Savings Accounts Annual Fees (% of GDP per capita)
Annual fees checking account
Annual fees savings account
1.6%
1.4%
1.4%
1.2%
% of GDP
1.0%
0.8%
0.8%
0.6%
0.7%
0.5%
0.4%
0.3%
0.2%
0.2%
0.2%
0.2%
0.1%
0.0% 0.0%
0.0%
LAC7
Asia
China
0.0%
India
0.0%
Eastern
Europe
0.0%
G7
0.0%
Oth. Adv.
Economies
0.0%
Brazil
Bond Markets
Bond Markets Have Expanded,
But Public Sector Still Large and Growing
Composition of Bond Markets, % of GDP
Private Bonds
Public Bonds
120%
100%
65%
% of GDP
80%
52%
60%
24%
31%
32%
45%
Source: BIS
China
33%
G7 (7)
1%
2%
5%
10%
1990-9
2000-9
1990-9
2000-9
2000-9
4%
30%
15%
India
LAC7 (7)
40%
11% 15%
Oth. Adv.
Economies
(5)
1990-9
33%
19%
Eastern
Europe (2)
23%
2000-9
48%
1990-9
41%
1990-9
2000-9
1990-9
Asia (5)
1990-9
4%
4%
0%
13% 14%
2%
2000-9
24%
1990-9
16%
40%
23%
2000-9
20%
20%
2000-9
40%
Brazil
Bond Market Turnover Not on the Rise
Bond Value Trading as % of Total Bond Market Capitalization
2000-2003
200%
2004-2007
2008-2009
178%
180%
% Total Bond Market Capitalization
160%
140%
120%
110%
100%
84%
80%
80%
56%
60%
40%
20%
30%
24%
18%
80%
59%57%
58%
39%39%
35%
31%
23%
15%
21%
12%12%
10%
3% 1%
0%
Asia (3)
China
Eastern
Europe (3)
G7 (4)
India
LAC7 (4)
Oth. Adv.
Economies
(4)
Brazil
Note: Trading data includes domestic private, domestic public and foreign bonds traded in local stock exchanges. Source: World Federation of
Exchanges (WFE)
Private Bond Issuance is Small …
Amount of New Issues
1991-1999
5.0%
2000-2008
4.7%
4.5%
4.0%
3.4%
% of GDP
3.5%
3.0%
2.5%
2.0%
1.7%
1.6%
1.5%
1.3%
1.2%
1.1%
1.0%
1.1%
0.8%
0.8%
0.5%
0.0%
Asia (5)
Source: SDC
G7 (7)
LAC7 (7)
Oth. Adv. Economies
(7)
Brazil
… Except in Chile
Total Amount of New Issues per Year as % of GDP
2000-2003
2004-2007
2008
5.0%
4.5%
4.3%
4.0%
3.5%
3.5%
3.1%
% of GDP
3.0%
2.5%
2.0%
1.6%
1.6%
1.5%
1.5%
1.1%
1.3%
1.2%
1.0%
0.9%
1.0%
0.5%
0.0% 0.1%
0.7%
0.6%
0.5%
0.1%
0.0%
0.0%
Argentina
Source: SDC
Brazil
Chile
Colombia
Mexico
Peru
Private Bonds: Few (and Fewer) Firms Use Markets
Average Number of Firms Issuing Bonds
1990-1999
500
2000-2008
462
450
400
369
Number of Firms
350
300
250
200
150
100
69
50
9
30
21
19
20
24
41
0
Asia (5)
Source: SDC
G7 (7)
LAC7 (7)
Oth. Adv.
Economies (7)
Brazil
Private Bonds: Few Issues Capture Significant Share
Concentration in Private Bond Markets
Amount Raised by Top 5 Issues
1991-1999
2000-2008
100%
% of Total Amount Raised
90%
80%
69%
70%
60%
60%
59%
55%
54%
50%
43%
39%
40%
41%
27%
30%
20%
20%
10%
0%
9
21
Asia (5)
369
462
G7 (7)
30
19
LAC7 (6)
20
24
Oth. Adv.
Economies (6)
69
41
Brazil
Note: Concentration is defined as the top-5 issues as a percentage of the total amount raised by firms in domestic bond markets. Numbers in the
base of the bars represent the average number of yearly issues. Source: SDC
Equity Markets
Equity Market Capitalization
Market Capitalization as % of GDP
100%
89%
90%
80%
70%
85%
77%
69%
66%
66%
62%
60%
54%
51%
50%
42%
40%
32%
31%
30%
28%
22%
20%
13%
13%
10%
0%
Asia (5)
China
Eastern Europe
(2)
G7 (7)
1990-1999
Source: SDC
India
2000-2009
LAC7 (7)
Other Advanced
Economies (7)
Brazil
Equity Trading: A Different Picture than Mkt. Cap.
Trading Activity – Turnover Ratio
1990-1999
200%
2000-2009
189%
180%
160%
140%
128%
Turnover Ratio
124%
120%
102%
100%
85%
80%
75%
73%
62%
61%
60%
50%
47%
46%
40%
25%
20%
17%
0%
Asia (5)
China
Eastern
Europe (7)
G7 (7)
LAC7 (7)
Oth. Adv.
Economies
(7)
Brazil
Note: Turnover ratio is defined as the total value traded per year in domestic markets over total market capitalization. Source: SDC
Partly Explained by Trading Abroad
Value Traded Abroad to Total Value Traded
2000-2003
2004-2007
2008-2009
70%
62%
61%
58%
60%
55%
% of Total Value Traded
54%
50%
43%
40%
30%
27%
23%
19%
20%
13%
12%12%13%
11%
10%
10%
16%
15%
12%
8%
3%
5%
4% 3% 5%
0%
Asia (1)
Source: Bank of New York and Bloomberg
China
Eastern
Europe (1)
G7 (5)
India
LAC7 (4)
Oth. Adv.
Economies
(5)
Brazil
Partly Explained by Migration Abroad
Domestic and International Value Traded over Domestic Market Capitalization
For Firms with DR Programs
2.5
0.1
Turnover Ratio
2
1.5
1
0.0
0.0
0.0
0.0
2.1
0.0
1.0
0.0
0.1
0.0
1.4
0.5
0.0
0.1
1.6
1.5
1.1
1.1
0.9
0.4
0.1
1.5
0.2
1.1
1.2
0.3
0.3
0.8
0.4
0.5
0.4
0.8
0
00-05 06-10 00-05 06-10 00-05 06-10 00-05 06-10 00-05 06-10 00-05 06-10 00-05 06-10 00-05 06-10
Asia
China
Eastern
Europe
G7
Domestic Turnover
Source: Bloomberg
India
LAC7
International Turnover
Oth. Adv.
Economies
Brazil
Domestic Firms Gaining Space in Brazil
Domestic Value Traded in Securities of Domestic and International Firms
Share of Total Domestic Value Traded
100%
90%
80%
70%
60%
78%
79%
80%
76%
74%
26%
2004
69%
68%
63%
31%
32%
37%
2005
2006
2007
50%
40%
30%
20%
10%
22%
21%
20%
24%
2000
2001
2002
2003
0%
Domestic Firms
Source: Bloomberg and EMDB
International Firms
… And Trading is Becoming Less Concentrated
Concentration in Domestic Equity Markets
Share of Value Traded by Top 5 Companies
1990-1999
2000-2009
80%
74%
73%
70%
63%
% of Total Value Traded
60%
58%
60%
57%
50%
40%
36%
39%
40%
39%
30%
21% 20%
20%
10%
0%
Asia (5)
Source: EMDB
China
Eastern Europe
(5)
India
LAC7 (6)
Brazil
Breadth of Equity Markets:
Issuance Activity Small (and Declining) in LAC
Equity Markets – Issuance Activity
1991-1999
2000-2008
1.8%
1.6%
1.6%
1.4%
1.4%
1.4%
1.1%
% of GDP
1.2%
1.0%
1.0%
0.9%
0.8%
0.8%
0.7%
0.7%
0.7%
0.6%
0.6%
0.4%
0.2%
0.3%
0.3%
0.3%
0.2%
0.2%
0.0%
Asia (5)
Source: SDC
China
Eastern
Europe (7)
G7 (7)
India
LAC7 (6)
Oth. Adv.
Economies
Brazil
Equity Markets: Few Firms List
Number of Listed Firms
1990-1999
2000-2009
6,000
5,207
5,000
4,441
Number of Listed Firms
4,000
3,000
2,322
2,072
2,000
1,382
1,000
828
715
425
441
225 167
224 175
385
545
403
0
Asia (5)
Source: WDI
China
Eastern
Europe (7)
G7 (7)
India
LAC7 (7)
Oth. Adv.
Economies
(7)
Brazil
Equity Markets: Even Fewer Firms Raise Capital
Average Number of Firms Raising Capital
1991-1999
2000-2008
600
531
500
Number of Listed Firms
400
296
300
258
200
86
100
101
118
91
86
58
38
2
0
Asia (5)
Source: SDC
China
18
5
Eastern
Europe (7)
G7 (7)
India
22
5
LAC7 (6)
Oth. Adv.
Economies
(7)
19
Brazil
Equity Markets: Also with Significant Concentration
Concentration in Domestic Equity Markets
Share of Amount Raised by Top 5 Issues
1991-1999
2000-2008
100%
92%
90%
85%
85%
% of Total Amount Raised
78%
77%
80%
68%
70%
60%
63%
61% 62%
54%
50%
47%
50%
67%
45%
39%
40%
29%
30%
20%
10%
0%
43 128
103 97
Asia (5)
China
4
8
Eastern
Europe (7)
315 381
532 109
G7 (7)
India
22
8
LAC7 (6)
Note: Numbers in the base of the bars represent the average numbers of yearly issues. Source: SDC
92 208
Oth. Adv.
Economies
(7)
Brazil
Institutional Investors
Pension Funds Gaining Ground
Pension Fund Assets
2000-2004
2005-2009
40%
34%
35%
33%
30%
30%
26%
% of GDP
25%
19%
20%
15%
16% 15%
16%
15%
12%
10%
5% 6%
5%
5%
0%
0%
2%
0%
Asia (4)
Source: AIOS
China
Eastern
Europe (7)
G7 (7)
India
LAC7 (7)
Oth. Adv.
Economies
(6)
Brazil
Mutual Funds Growing Too
Mutual Fund Assets
2000-2004
2005-2009
45%
40.2%
40%
36.7%
34%
35%
% of GDP
30%
27%
23.7%
25%
20%
15%
19%
17.1%
12%
10.0%
10%
7.9%
7.4%
4.3%
5%
2%
7%
4%
2%
0%
Asia (4)
Source: ICI
China
Eastern
Europe (7)
G7 (7)
India
LAC7 (7)
Oth. Adv.
Economies
(6)
Brazil
… However, Portfolios are Concentrated in
Deposits and Public Bonds
Composition of Pension Fund Investments in Latin America
100%
90%
80%
Govt. Securities
Fin. Inst. Sec/Deposits
Private Bonds
Equities
Mutual Funds
Other Investments
2%
2%
3%
11%
14%
6%
9%
% of Total Portfolio
Foreign Securities
12%
70%
60%
21%
8%
16%
50%
40%
30%
51%
20%
45%
10%
0%
1999-2004
Source: OECD, ABRAPP, AIOSFP, FIAP, and local sources
2005-2008
… However, Portfolios are Concentrated in
Deposits and Public Bonds
Portfolio Holdings of Pension Funds:
Cash and Deposits
100%
Public Bonds
Private Bonds
Loans
2%
10%
90%
10%
% of Total
5%
1%
70%
16%
Mutual Funds
4%
40%
19%
34%
10%
25%
20%
37%
20%
16%
1%
1%
19%
20%
6%
30%
40%
11%
20%
10%
10%
22%
60%
50%
Others
18%
7%
80%
Equity
32%
24%
0%
Asia (2)
26%
16%
5%
3%
2%
Eastern Europe (4)
G7 (5)
LAC7 (5)
Source: OECD – Latest available information. Data for most countries are from 2009.
7%
Other Advanced
Economies (6)
Mutual Fund Assets Also Concentrated in Bonds
and MM Instruments
Mutual Funds - Portfolio Holdings
Brazil
% of Total Assets
100%
Deposit Certificates
Government Bonds
Private Bonds
Fixed Inc. Sec. Backed by Gov. Debt
Equity
Others
4%
90%
11%
80%
2%
5%
5%
17%
70%
15%
60%
4%
50%
40%
73%
48%
30%
20%
10%
0%
6%
2003-4
Source: IMF’s IFS, FGV-Rio, Conasev, Superfinanciera, Andimia, and Banxico
11%
2005-9
Mutual Fund Assets Also Concentrated in Bonds
and MM Instruments
Mutual Funds - Portfolio Holdings
Chile
Deposits
Private Bonds
Domestic Equity
100%
% of Total Assets
90%
14%
Foreign Equity
6%
8%
80%
2%
4%
9%
70%
17%
13%
63%
63%
2000-4
2005-9
60%
50%
40%
30%
20%
10%
0%
Source: IMF’s IFS, FGV-Rio, Conasev, Superfinanciera, Andimia, and Banxico
Public Bonds
Mutual Fund Assets Also Concentrated in Bonds
and MM Instruments
Mutual Funds - Portfolio Holdings
Mexico
Deposits
Dom. Public Bonds
Dom. Private Bonds
For. Public Bonds
Equity
Others
For. Private Bonds
100%
90%
%of Total Assets
80%
12%
10%
9%
9%
61%
63%
15%
14%
2003-4
2005-9
70%
60%
50%
40%
30%
20%
10%
0%
Source: IMF’s IFS, FGV-Rio, Conasev, Superfinanciera, Andimia, and Banxico
Among Debt Securities: Pension and Mutual Funds
Short Term vs. Insurance Cos.
Maturity Structure of Chilean Domestic Mutual Funds and PFAs
vs. Insurance Companies
100%
90%
Share of portfolio
80%
70%
60%
50%
40%
30%
Chilean PFAs
20%
Chilean Domestic Mutual Funds
10%
Chilean Insurance Companies
0%
1
2
3
4
5
6
7
8
9
10
Years to maturity
Avg. Maturity
(1) Chilean Insurance Companies
10.32
(2) Chilean Domestic Mutual Funds
3.88
(3) Chilean PFAs
3.16
Note: This figure compares the maturity structure of Chilean insurance companies to that of Chilean domestic mutual funds and PFAs. Only
medium- and long-term bond mutual funds are taken into account. Source: Opazo, Raddatz, Schmukler (2011).
112
Even When Investing Long Term Pays Off
Bond Sharpe Ratio at Different Maturities and Holding Periods
Indices Based on the Estimated Yield Curve
2.5
2.5
2
2
1.5
1.5
Sharpe Ratio
Sharpe Ratio
Indices of Chilean Government Inflation-Indexed Bonds
1
1
0.5
0.5
3m
12m
24m
36m
3m
12m
24m
36m
0
0
1
2
3
5
6
9
10
12
15
18
1
20
2
3
5
6
9
10
12
15
18
20
Years to maturity
Years to maturity
3m
24m
12m
36 m
Note: This figure presents the Sharpe ratios (average returns/standard deviations) of Chilean bonds of different maturities for various holding
periods (3 months, 1 year, 2 years, and 3 years). It shows statistics for indices of government inflation-indexed bonds, and using prices from
model-based estimations of the yield curve. Source: Opazo, Raddatz, Schmukler (2011).
113
Conclusions
Concluding Remarks: Bottom Line
 Substantially different & better, even when “insurmountable”






Deeper systems, in domestic and international fronts
More saving and more resources available in the economy
Less crowding out by governments, but governments still large
According to some measures, consumers appear to be better served
Financial system more complex, somewhat more diversified
• Not that much bank-based
• Bonds and equity play bigger role, corporate bonds emerging
• Institutional investors much more prominent
• Other types of financing taking off
Nature of financing is also changing
• Longer maturities and less dollarization – less credit risk
• More local financing, though foreign markets important for some
• Fewer mismatches in domestic and external balance sheets
Concluding Remarks: Bottom Line
 But several countries still lagging behind in many respects

Growing divergence and cross-regional heterogeneity
 No finance for all!

Financial development through capital markets not spread to all firms
 Constraints not on the supply side of funds (based on broad data)
 Constraints likely not on specific regulatory issues

These get much attention at country level, but this is a cross-country issue
 Financial intermediation process more difficult than thought




First expands to areas relatively easy to finance
Incentives might play crucial role for more risk taking
Might not yield socially optimal outcome
Financial intermediaries brain of the economy, with MS
Going Long and Riskier
 LAC’s current asset managers

Charge substantial fees

Yet spend mostly in marketing rather than asset management

Large chunk of domestic savings intermediated by them

Avoid risk taking, denying savers good long-term returns …

… and corporations risk capital

But at the same time shield them from volatility

Herd to be close to the pack
 The pitfalls to avoid (U.S.)

Excessive risk taking

Liquidity fallacy
Going Long and Riskier
 Some of the policy challenges

Step up the state’s oversight without undermining private monitoring

Promote market discipline through standardization and benchmarking
without boosting short-termism

Take more long-term risk while being able to monitor managers

Be contrarian and use potential long-term arbitrage opportunities
without generating backlash due to negative outcomes

Develop alternative ways of promoting participation (mandatory
participation, shared infrastructure)

Generate healthy competition among financial intermediaries without
perverse incentives

Take advantage of useful international diversification
Concluding Remarks: Bottom Line
 Not clear how to proceed in many areas


Institutional investors are emblematic
Similarly with banks and capital markets
 Nor what to expect of capital market financing
 Plus lack of obvious paradigm at international level


Collapse of role models: no roadmap after the crisis
E.g. what to make of securitization and mortgage financing?
 Eventually, need to catch up, grow, and take risk without
undermining stability: strong trade-off



Macro-prudential policies might not help
Hard to distinguish spurious boom from leapfrog
Especially for lagging areas and countries
Thank you!