Painting the SFI Landscape
Observations from a Survey of State-Owned Financial Institutions
By David Marston and Aditya Narain
I. INTRODUCTION
The state has a major presence in the financial sector of many countries around the world.
This is particularly visible in banking, where despite several privatization initiatives over the
last decade, public sector banks are still estimated to account for a significant portion of total
banking sector assets.1
State intervention, however, is not confined to banking but also extends, albeit in a lesser
degree, to insurance and contractual savings and collective investment schemes. Further,
though state intervention is often more prominent in the developing world, it can also play an
important role in the developed world, taking a variety of different forms from direct
presence—banking in Germany to sponsorship—GSEs in the United States (Box 1).
In the course of their country work, Fund staff regularly face issues of how the SFIs should
be dealt with, given the overwhelming perception of SFIs as being inefficient and a fiscal
drag. The resulting “wisdom” is that privatization is the route toward efficiency and more
effective supervision. Notwithstanding, and even after the spate of privatizations in the
1970s, SFIs continue to thrive and have played significant roles in financial stability—from
being a catalyst to crisis in Turkey, to being a stabilizing force in Russia.
Over and above privatization, a quick survey of the headline issues over the past few months
reveal the spectrum of issues that have confronted policy makers with regard to SFIs—
recapitalization from the central bank reserves (China), concern of implicit guarantees of the
housing GSEs and their supervisory framework (USA), buyback of equity of state banks and
merger of development institutions with state banks (India), merger of development banks
among themselves (Jamaica, Thailand, Taiwan, Indonesia, and Iran), and the furor over the
threatened ratings downgrade of state banks (Germany).
While information failures, externalities, economic disequilibrium, failure of competition,
incomplete markets, institution building, and the need to redistribute resources according to
the social agenda are often the rationale2 for intervention by the state, its detractors remain
See, for example, data on the “percentage of bank assets government owned” for
107 countries tabulated in Barth (2001).
1
2
The U.S. budget documents contain an informative account of the rationale for state
intervention in the financial sector. See, for instance, Chapter 8 of the 1998 budget document
(Analytical Perspectives). For a discussion on the adverse effects of state ownership, see
Chapter III of IMF (1998) and Carmichael (2002).
533581790 March 9, 2016 (12:42 AM)
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Box 1. State Intervention in the Financial Sector in
Advanced Economies—United States of America
In the USA, the intervention of the state in the financial sector takes place in the form of both direct loans and
guarantees as well as through the government-sponsored private enterprises. The range of intervention and the
public perception of these programs is best summarized in this extract from the U.S. Budget Document for
FY 2003:
“Federal credit programs offer direct loans and loan guarantees for a wide range of activities, primarily
housing, education, business and rural development, and exports. At the end of 2001, there were $242 billion in
Federal direct loans outstanding and $1,084 billion in loan guarantees. Through its insurance programs, the
Federal Government insures bank, thrift, and credit union deposits up to $100,000 guarantees private definedbenefit pensions, and insures against other risks such as natural disasters.
The Federal Government also enhances credit availability for targeted sectors indirectly through Governmentsponsored enterprises (GSEs)—privately owned companies and cooperatives that operate under Federal
charters. GSEs provide direct loans and increase liquidity by guaranteeing and securitizing loans. Some GSEs
have become major players in the financial market. In 2001, the face value of GSE lending totaled $3.1 trillion.
In return for serving social purposes, GSEs enjoy some privileges, which include eligibility of their securities to
collateralize public deposits and be held in unlimited amounts by most banks and thrifts, exemption of their
securities from SEC registration, exemption of their earnings from State and local income taxation, and ability
to borrow from Treasury, at Treasury’s discretion, in amounts ranging up to $4 billion. These privileges leave
many people with the impression that their securities are risk-free. GSEs, however, are not part of the Federal
Government, and their securities are not federally guaranteed. By law, the GSEs’ securities carry a disclaimer
of any U.S. obligation.”
The reasons for intervention by the state are mentioned as information opaqueness (e.g. about certain groups of
borrowers like start-up businesses and farmers); externalities (without state intervention, people may invest less
than socially optimal amounts in activities that generate positive externalities, while over-investing in those that
generate negative externalities), resource constraints (of the private sector, for example, in deposit insurance)
and imperfect competition (because of barriers to entry, economies of scale, and foreign intervention). In the
U.S. context, the main rationale for the Federal role is to “provide credit and insurance that private markets
would not provide.”
A host of government departments and GSEs are involved in the administration of these programs and their
oversight—Department of Housing Affairs; Department of Veteran Affairs; the Department of Agriculture;
Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System (housing finance); Department of
Education and Sallie Mae (education loans); Small Business Administrations, Farmer Mac, and the Farm Credit
System (business and rural development credit); Departments of Agriculture, Defense, State, and Treasury and
AID; OPIC and Export-Import Bank (international credit); FDIC (deposit insurance); Pension Benefit
Guarantee Corporation (private pension plans); Federal Emergency Management Agency (flood insurance); and
Risk Management Agency of USDA (subsidized crop insurance). The scope and content of these programs is
substantial, so much so that the Budget Document of FY 1998 mentioned that “the Federal government
continues to be the largest financial institution in the United States.”
In recent times, concern is being expressed about the exponential growth in the contingent liabilities of some of
the GSEs, especially in the housing finance and the pension segments, and calls for capping these have been
reported in the press. At the same time, there is also discussion on the strengthening of the supervisory
arrangements for some of these agencies, following an accounting scandal in one of the largest GSEs.
-3-
unconvinced. They see state ownership as creating market distortions, thwarting competitive
forces, limiting supervisory effectiveness, clouding the budgetary process, leading to
frequent recapitalization, and increasing the scope for patronage and corruption. In any case,
as is argued, the state can always intervene directly through the budget process to instead of
seeking to ‘own’ for instance, banks.
Many reasons have been offered as to why the state chooses to ‘own’ a financial
institution3—for instance, the private sector institutions may not have developed in the
sector, or it may want to directly control the outcomes, i.e., to make a political statement.
While many institutions have been created specifically for the purpose of lending to priority
regions or activities or offering subsidized insurance to vulnerable target groups, there have
also been waves of nationalization of the private sector institutions, particularly in the
decolonization phases, where the attempt may have been, in part, to reduce the economic
concentration of power. While there has been a gradual return of ownership to the private
sector, particularly in Europe and Latin America, the state will continue to be a dominant
player in the financial sector for times to come.
II. IMF SURVEY
In this background, IMF conducted a survey4 of countries in October 2003 of the structures,
relationships, and incentives that affect the performance, supervision, and governance of
SFIs. It seeks to provide an insight into some of the following questions: do SFIs have a
competitive advantage over the private sector in terms of funding? Are they subject to less
effective supervision? Are their governance policies intrinsically weak?
The survey aimed at initiating an agenda of research that abstracted from issues of ownership
but rather recognized SFIs as a fact of the financial landscape. Staff experience has been that
oversight arrangements vary markedly, and absent explicit guidance from the standard
setters, the research agenda would aim at developing good practice guidance on oversight
that would better inform the work of the Fund.
The survey sought responses from a large group of member countries on all ‘state-owned’
financial institutions whether commercial and specialized/development banks and nonbanks,
insurance companies, or collective/other investment schemes such as mutual, investment,
provident, and pension funds. Keeping in mind that the influence of ownership could be
exercised by the state, even in the absence of a majority stake, ‘state owned’ was defined as
“any shareholding arrangement by which the state (central, state, local, or other elected body)
or any entity of the state has a controlling ownership interest or a minority that allows the
3
See Hemming and Fouad in this volume for a discussion on the rationale of state ownership
of banks in this volume.
4
See Appendix for the format of the survey.
-4-
state to exercise management control.” Information was sought from national authorities on
the following broad areas: types of institutions and activities; ownership structures; policy
goals; funding arrangements; supervision and oversight; and governance arrangements.
At the time of this conference, the survey still represented work in progress. Of the
25 countries which responded, 2 countries reported ‘nil’ state-owned institutions, while 1
country reported that it had only 1 insurance company in this category, which had been set up
to in the aftermath of a particular event, and that it would be wound up by the end of the year.
The remaining 22 countries reported 680 SFIs in all three broad segments—banking,
insurance, and securities/investments, though commercial banking was by far the most
significant.
In the following sections, some of the results of the survey are presented. However, there are
some very important caveats to be kept in mind while interpreting these results. First, the
sample is actually by default based on those countries that responded to the survey in time
and, hence, these results should not be taken to be representative of the universe. For
instance, of the entire 680 reported institutions, 1 developed country reported 520 banking
institutions owned by the local and state governments which would tend to give a very
skewed picture of SFIs in the developed world! As data for these were presented on an
aggregate basis, these institutions have not been taken into account while presenting many of
the responses.
Second, in some cases the responses are incomplete, i.e., the authorities contacted have
reported only on the institutions that are supervised by them or are under their regulatory
influence. As our contact agencies were the central banks and the bank supervisor in most
cases, hence, the number of SFIs, especially the nonbanks, may have been underreported. In
addition, there are several other factors which have likely inhibited the authorities in their
responses or have delayed them. The first is the apprehensions that the survey results may be
used to underscore or promote the privatization agenda of the international institutions since
this has often been an important component of Fund/Bank advice. A second reason is that
simply no single agency has this information. As a result, it would require a coordinated
effort among many agencies to obtain this information in several countries, because the SFIs
could be under the administrative charge of a host of ministries and spread across federal,
regional, and local governments.
III. THE SFI LANDSCAPE
SFIs are prevalent in many areas of financial activity. Countries were asked to report on
each SFI, indicating what type of institution did it operate as (commercial bank, development
bank, etc.) From the institutions in the state sector reported in the survey (Table 1), it may be
seen that SFIs are prevalent in many areas of financial activity although commercial banking
is dominant (and the most discussed). Further, they are a feature in both the developed and
developing countries in the sample, although in the former, their presence is only in the
banking and insurance sectors. Among banking institutions, some were reported as banks,
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others as development banks, and in 5 countries, as institutions which engaged in both
commercial and development banking.
Table 1. State-Owned Financial Institutions in Responding Countries
Commercial banks
(1) (2)
Development banks
Commercial cum
development banks
Postal banks
Nonbank finance
companies
Development financial
institutions
Leasing companies
Mutual guarantee
companies
Insurance companies
(3)
Asset management
companies/funds
Mutual funds
Pension/provident
funds
Investment
companies/funds
Health insurance fund
Total (4)
Advanced Economies
Institutions Countries
19
5
Other Emerging and
Developing Economies
Institutions Countries
56
11
Total
(institutions)
75
Total
(countries)
16
4
1
4
1
9
9
5
3
13
10
9
4
1
0
1
0
2
2
2
2
3
2
3
3
1
1
6
2
7
3
0
21
0
1
2
0
1
0
2
21
1
1
3
2
2
2
5
3
0
0
10
3
10
3
0
0
0
0
2
3
1
2
2
3
1
2
0
0
4
1
4
1
0
50
0
1
1
108
1
158
1
Notes:
(1) Under commercial banks, advanced economies, institutions, includes 1 bank providing both banking and
insurance services, and another bank providing banking, insurance, and asset management services.
(2) Under commercial banks, other emerging and developing economies, institutions, includes four banks
providing banking and asset management services, and one bank providing banking, insurance, and securities
services.
(3) Under insurance companies, other emerging and developing economies, institutions, re-insurance
company.
(4) Under total, advanced economies, institutions, excludes 520 savings banks owned by the state and local
governments reported by one country for which aggregated data was reported.
-6-
The size of the SFI sector can be significant (Table 2). In the sample, the size of the assets
of the state-owned institutions varied from insignificant to 159 percent of GDP. Among the
different types of institutions, banks tended be the most significant in size, with the largest
single bank having assets equal to 47 percent of GDP, development bank 13 percent,
insurance company 2.9 percent, DFI 2.3 percent and a pension fund 18 percent. The size of
the assets under management of AMCs was not given.
Table 2. Size of the SFI Sector
Other
Size to GDP
Advanced Emerging/
(in percent)
Economies Developing
0-1
3
2
1-10
1
4
10-50
2
6
50-100
1
1
100+
1
1
Total
8
14
Note: Under the size to GDP column,
100+ includes 520 banks excluded from
Table 1, which together account for
48. percent of GDP in the country.
Minority shareholding by the state was uncommon. Of the institutions for which data was
provided, about half were fully owned by the state (40 percent by the central government and
less than 10 percent by state or local government). Another 20 percent were majority central
government owned (with the stake ranging from 50 percent to 99 percent) and 20 percent
majority owned by the state government. In the remaining 10 percent, the government held a
minority stake but held control over management, thus leading to their classification as a SFI.
Nationalization or takeover of private institutions was rare. Only nine institutions in
three countries were reported to have been nationalized, erstwhile private sector institutions.
All others were set up in the public sector with specific objectives. In the case of banks, these
objectives ranged from benefit of a particular region, trade, or activity (SME, artisan, and
tradesmen) to agriculture, trade, encouragement of thrift, housing, and even collection of
judicial deposits. In the case of development banks it ranged from general economic
development to development of infrastructure, middle and low income housing, and
international trade. The development financial institutions (DFIs) had been set up for the
support of specific sectors such as industry, agriculture, housing, and tourism. The insurance
companies included general insurance, reinsurance, and export credit insurance. The mutual
guarantee companies specialized in providing financial guaranties to their participant partners
(SME) focused on specific regions or sectors of activity and the government reinsures the
majority of transactions under public policy programs. Investment funds were mainly linked
to social safety nets such as health insurance and retirement, while the nature of business the
asset management funds/companies was not specified.
-7-
In Table 3, we include a sampling of the objectives of the institutions, as laid out in the
authorizing or acquiring law, to provide an insight into the diverse flavor of public policy
expectations from these institutions and also reproduce in Box II, the multitude of objectives
assigned to just one SFI.
Table 3. Policy Objectives of SFIs
Type of
Institution
Commercial
Banks
Postal Banks
Development
Banks
Development
Financial
Institutions
Insurance
Companies
Export Credit
Agency
Health Fund
AMC
Stated Policy Objectives in Authorizing/Acquiring Law of SFIs
to support the economic development of the country; to take money from juridical and natural persons and
to allocate them; to establish conditions for the implementation of the regional economic and social
programs; to direct lending to the priority industries and the population; to order the financial and economic
relations between enterprises, establishments, organizations, financial institutions, state bodies, financial
flows and the region’s budget; (to ensure) timely receipts of tax payments; to undertake mortgage lending
and issue of mortgage bonds; to participate in realization of national investment policy in priority sectors of
economy; to earn profits; to receive and grant loans on behalf and by order of the government; to create a
system of financing and lending to producers of agro industrial sector; to liven up the work of the
administration on capital markets; to make operations with budget accounts of the district and local
authorities; to develop progressive forms of the external economic links to widen the export potential; to
ensure the equilibrium of the balance of payments and increase the efficiency of public production; to
support artisans, tradesman, and SME’s economically; to stimulate public savings; and to collect and
manage deposits imposed by the law or by the courts.
to grant loans to public sector; to encourage the savings of households nationwide; to protect small
depositors; and to support the government housing policies by granting subsidized housing loans.
to promote the state’s economy ensuring credit to all economic sectors; to promote productive activities in
the region; to specialize in medium- to long-term operations; to provide fixed and working capital; to offer
guarantees and direct technical assistance for the preparation and capacitation of personnel specialized in
the execution of projects aiming at the social-economic development of the state; furtherance of financing
according to state commission; to make loans and other financing to public sector; to support the country’s
development policies by extending loans to the joint-stock companies; to channelize savings in the country
and abroad toward development-oriented investments; to contribute to the improvement of the capital
markets; to support infrastructure investments and other investments of the municipalities both financially
and technically; to favor the development of the national economic activities; to serve as the financial arm
of the development policy of the state; to provide exclusive management of consignations; support of
government’s housing policies by granting residence loans to government employees; asset management
services to other public entities; and to provide second floor operations to private financial entities
development of SMEs countrywide; provision of Agricultural Credit to Farmers; to investigate and finance
tourism; to provide loans and grants of public moneys for the construction of dwellings; and granting of
loans for housing purposes with priority given to persons of middle or low income
to act as an insurer in respect of the assets and prospective liabilities of the (state) and statutory
corporations; to transact workers compensation insurance; to administer a motor accident compensation
scheme; to carry out functions in relation to the management and control of moneys and other assets of the
(states) and statutory corporations; and to create a local reinsurance capacity
the improvement of exports, diversification of exported goods and services, causing exportation to enter
into new markets; providing exporters and overseas contractors with support for increasing the
competitiveness and security in international markets; and supporting and encouraging overseas
investments and production and sale of export-oriented capital goods
to support the development of an efficient and equitable health care system by providing affordable,
accessible health insurance
to mobilize investment and to make operations on the securities market;
-8-
Box 2. Financial Superheroes—Public Policy Expectations from SFIs
When SFIs are seen as instruments to implement the economic and development
policies of the state, they can be entrusted with a variety of wide-ranging and
diverse objectives. Such public policy expectations from SFIs can be challenging
for the management of the institution. As an example, the objectives of a leading
state-owned financial institution in one major emerging economy extracted from
one response to the survey question on “ policy objectives in authorizing/
acquiring law’ is listed below:
...help the Federal Government in carrying its credit policy and aims (i) taking deposits, of any
kind, (ii) offer banking services, (iii) manage exclusively the Federal Lotteries, (iv) act exclusively
as a pawnbroker, (v) offer services on behalf of the Federal Government, provided those services
are of the nature of a financial institution, or provide other services under agreements with other
entities or companies, (vi operate in the financial and capital markets, (vii operate as an
underwriter, broker, or dealer in the stock market, securities market, or any other capital market,
(viii operate as an issuer and manager of credit cards, (ix operate in the foreign exchange market
(x) operates as an insurance dealer, stocks dealer, and operate in the leasing market, (xi) offer
services related to the incentive of culture and tourism, (xii) manage Federal Government’s
housing and sanitation programs, (xiii) manager of the Government Severance Indemnity Fund for
Employees, (xiv) manage the funds of programs on behalf of the Federal Government, (xv) grant
loans and financing of social nature, (xvi) operate in the financial and capital markets on behalf of
the Federal Government, (xvii) operate as a custody agent, and (xviii)offer services of consultancy
and management of economic activities, public policies, welfare, and other subjects related to its
activities.
The spectrum of objectives incorporates, other than the traditional banking,
insurance, and securities, more exotic areas such as pawn broking, lottery
management, sanitation, culture, and tourism. Considering that SFIs can also
suffer from ‘mission creep’ in that more objectives can be added on to their
mandate to meet specific situations, they may often face situations where they are
actually being guided by conflicting objectives. In this context, devising better
methods to measure their performance to more accurately reflect their effects can
be a task as challenging as supervising their multi-faceted operations.
IV. ISSUES IN COMPETITION AND FINANCIAL RELATIONS WITH THE GOVERNMENT
Among the many reasons why SFIs are seen to thwart competition is that they are perceived
to have a funding advantage over the private sector on account of their access to the deep
pockets of their owner, often through concealed subsidies and transfers that can bail them out
of trouble. This often implicit and sometimes explicit guarantee allows them to access
funding at cheaper rates. Governments recognize this contingent liability but this is not often
reflected in their budgetary estimates. Besides, particularly in the case of banks, they are
often the preferred bankers for the state, receiving both deposits and government business.
-9-
Though the survey did not address these issues primarily, the responses provide an insight
into some of these issues and are discussed in this section.
SFIs may have access to a more extensive funding base. While commercial banks, as well
as commercial cum development banks, relied mainly on retail deposits as their main funding
sources, 90 percent of the development banks had no retail deposits. There were, however,
two development banks which reported around 40 percent exposure to retail deposits. This
clouds the distinction between development banks and commercial banks and presents a
situation where the rationale for the regulation for both could be the same. In addition, one
reinsurance company, one investment company and three DFIs also reported high (more than
70 percent) retail deposits. The development banks relied more on wholesale deposits and
long-term borrowings from the treasury and central bank as their major funding source. In
addition, direct government grants were reported as funding sources for commercial banks
(two countries), commercial and development banks (two countries) and for the guarantee
companies in one country, and two for other institutions. Far more important and widespread
was the reliance on government deposits, which were reported by banks and development
banks in nine countries, but were more significant in development banks (up to 65 percent of
the total) than in commercial banks (up to 3 percent of the total).
In a few cases, the state provides explicit guarantees for the liabilities of the SFIs. While
one country offered full coverage for all deposits of the state banks, another country covered
retail deposits in full for 4 of the 19 state banks it reported and for the MTNs, marketable
bonds and CPs issued by two other banks; while two countries offered this coverage for the
deposits held prior to the takeover of acquired banks. In the case of development banks, two
countries explicitly guaranteed the retail and wholesale deposits, as well as bond and other
borrowings of the development banks, while one country each covered the retail deposits of
its postal bank, commercial cum development bank and development financial institution.
Policy lending was an important feature, though bank supervisors were at times used
for monitoring policy targets. Sixty-one institutions (including 13 institutions stated to be
operating as commercial banks) reported receiving annual or periodic policy targets from the
government. These targets were monitored regularly, with period varying from one week to
one year and by different bodies—the concerned ministry (ministry of property,
development, industry, foreign trade, foreign affairs, science and technology, and any other
ministry that allocated the resources for the SFI; the Board, the SEC, the audit court, and in
several cases, (18 institutions in 5 countries), the bank supervisors or central bank. Again, in
many cases, the performance was monitored jointly by more than one agency.
Transfers to the SFIs from the state are often off the budget and non-transparent. Nine
institutions reported receiving annual or periodic funds from the government which were all
itemized in the government budget. Another 41 institutions (in 11 countries) reported
receiving government funds only under ‘infrequent special conditions’ and of these, 13 (in
5 countries) reported that the funds were not itemized in the government budget.
SFIs were also used for raising financial resources for government. Of the 34 institutions
that reported government bonds as an area of activity, 20 had an exposure less that
- 10 -
10 percent of assets, 9 between 10 percent to 50 percent and 5 had an exposure greater than
50 percent. These were three banks and two postal banks. In addition, of the 36 SFIs, that
reported data on the average percentage of net profits transferred to the government, in nearly
half the cases, these were more than one third of the net profits.
Profitability and performance was not without concerns. Though the majority of the
institutions were intended to be run on a ‘for profit’ basis with the rest to be run on a ‘zerocost’ basis, nearly one third of all institutions for which individual data was available
reported a loss in at least one of the three previous years. Capital injections were fairly
widespread ( see Table 4) and not infrequent and took many forms such as subscriptions of
shares, reinvestment of dividends receivable/issue of shares in lieu of dividend, fiscal
appropriation, issues of special government bonds, transfers from the concerned ministry,
grants, assumption of debts (banks), and assumption of losses (insurance). As many as
63 institutions reported capital injections since inception (32 banks, 9 development banks,
8 commercial cum development banks, 1 postal bank, 4 DFIs, 3 insurance/guarantee
companies, 3 AMCs, and 1 ECA. In 42 cases, the most recent injection had taken place in the
period 2000–03, while in 37 cases, there had been more than one capital injection in the past,
including in 19 banks, 1 postal bank, 5 development banks, 8 commercial cum development
banks, 2 AMCs, 2 DFIs, and 2 insurance companies.
Table 4. Capital Injections in SFIs
For Profit
Zero Cost
71
11
18
6
(25 percent) (55 percent)
Capital injections in previous periods
41
10
(58 percent) (90 percent)
(1) excludes 21 guarantee companies run on zero cost basis which reported
financials on an aggregated basis.
Number of institutions (1)
Losses in one or more of past three years
If profit maximization is not the stated goal of the SFI, then financial data needs to be looked
at in conjunction with the desired outcomes vis-à-vis the policy goals to make an assessment
of the performance of the SFI.
Does moral hazard affect the risk behavior of SFIs? It could be argued that because the
state has a history of bailing out SFIs in times of distress and, because many SFIs are used to
affect policy lending or investment, the managers of the SFIs are encouraged to engage in
riskier lending/investing behavior. This, in turn, could be reflected in a higher level of NPLs.
At the same time, when combined with the desire of the state to minimze the reported “cost”
of operating the SFIs to meet its own budgetary needs, this could also result in lower
provisioning for the NPLs.
- 11 -
Table 5. NPLs and Provisioning Coverage of SFIs
Provisions
NPL
Number
to NPLs
Number
(in percent)
of SFIs
(in percent)
of SFIs
0–5
27
0–5
7
5–10
21
5–10
12
10–20
12
10–20
8
20–50
8
20–50
9
>50
3
>50
39
Note: (1) Under >50, under Provisions to NPLs,
under Number of SFI, includes 10 which report
full or more provisioning
No solid conclusions should be drawn from the data presented in Table 5, (except that
managing credit risk remains challenging for SFIs) in the absence of comparator private
sector data and given that there may be a difference in the classification, provisioning, and
taxation regimes. However, one third of the SFIs reported NPLs higher than 10 percent while
a similar proportion also showed that their provisioning covered less than half the reported
NPLs.
V. ISSUES IN SUPERVISION & GOVERNANCE
The survey sought information on a variety of supervisory aspects:
Most institutions are subject to some form of minimum prudential standards. The
exception to this were 2 postal banks, 3 development banks, the 2 mutual funds, the
2 pension funds, and the 4 investment companies. While the standards were prescribed under
the relevant banking laws for the state-owned banks, for one postal bank, it was the State
Corporations Act; and for the development banks, it varied from the law incorporating the
institution, legislative decrees, the Companies Act, special resolutions/regulations of the
central bank, the central bank act, the banking law or its amendments; for the insurance
companies, it was mainly the insurance act; for the guarantee companies, it was a special act;
for the DFIs, it was state corporations act; and for the NBC, it was the central bank law
combined with federal law.
Loose convergence of supervisory approaches—The responses suggest that in many
countries the approaches to supervision/regulation applicable to commercial banks are being
carried over to the development banks and the DFIs, and in most cases, the supervision of
these entities had been entrusted to the banking supervisor. Most development banks were
subject to risk-weighted capital requirements like their commercial banking counterparts.
However, the practices were not as uniform in other aspects—for instance, while most
development banks were subject to some form of single/group borrower exposure limit, it
- 12 -
was not always linked to the entities equity. In some cases, it was an absolute amount; in
some cases, it was determined by the budgetary laws or by internal resolutions or estimates.
The mutual guarantees companies were subject to regulation identical to banks and were also
supervised by the bank supervisor, as were 3 of the DFIs.
The plethora of oversight agencies could lead to conflicting interests and coordination
issues. For banks, compliance with regulations was most often supervised by the banking
supervisor. In addition, in many cases, the performance targets were also monitored by the
supervisor which could be seen to create a conflict of interest. In one of the two countries
reporting the biggest size of the sector, the authorities for monitoring compliance with the
standards were, in addition to the bank supervisory agency, the ministry of finance, the
national auditors, and foreign exchange administration. In the case of the second, compliance
was monitored by both the supervisory agency and the state government for the banks and
the ministry of finance with the ministries of economy and labor for the development bank.
In another case, it was mentioned that the compliance with the standards was done by the
banking supervisor at the request of the ministry of finance, although the final responsibility
lay with the ministry. For the one postal bank, which was reported to be supervised, the
relevant agency was the ministry of finance and the office of the president. For some
nonbanks, compliance with regulations was monitored by the administrative ministry
(ministry of finance or economy or the concerned ministry for the DFI (tourism, agriculture,
etc.)). For the insurance companies, the supervisor was the insurance supervisory agency,
except in two cases, where it was the treasury in one case and a combination of a private
auditor, economy ministry, and a parliamentary tribunal in another.
Regulatory forbearance is more likely to be implicit rather than explicit. Exemption
from banking law was specifically provided only in a few cases involving development
banks and postal banks. Further, supervisory standards could differ between state-owned
enterprises and their private sector counterparts. Although, in most cases where institutions
were subject to prudential standards, they were reported to be subject to the same standards
as their counterparts in the private sector; some countries did report that different standards
were applied for SFIs. This ranged from banks including development banks (1 country);
postal savings banks (1 country), commercial cum development banks (1 country), funds
under public sector management (2 countries), insurance agency (1 country), and DFIs
(1 country). In addition, some other responses were nuanced with a country with major SFI
presence indicating that “while the supervisory principles were the same, the standards may
differ among different types of institutions.”
Corrective action by the supervisor was limited in certain institutions. Even in cases
where the development banks were subject to supervision by the supervisory agency, one
supervisor stated that the supervisors could “only draw the attention of the bank to the
developments concerned and try and find a solution in consultation with the MoF, which
could take corrective action,” while another stated that they would “take minor action while
leaving stronger action to the Ministry of Finance.” Of course, in the case of postal banks and
those development banks and DFIs which were not subject to supervision, no corrective
action was available to the supervisors. On the issue of whether the supervisor had to
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necessarily consult with the government before taking corrective action, one country stated
that this was so in case of severe punishment measures; two others reported that this was
necessary for their banks; another for the supervised postal bank; and in one case, for a
commercial cum development bank.
Inspection and audits were a regular feature although external auditors reports were
not always disclosed. On-site inspections were a regular feature at the banks and insurance
companies and only 1 bank reported that no on-site supervision was carried out because the
supervisors relied on off-site surveillance for all banks in that country. In addition, one
development bank which was otherwise supervised reported that it was not inspected on-site
although all other development banks and DFIs were inspected regularly by the supervisors.
While regular audits by external auditors were required in all cases, in several nonbank
institutions, this was performed by an arm of the state, most often the Comptroller & Auditor
General (1 postal bank, 1 commercial cum development bank, 5 DFIs, 2 insurance companies
and all the funds). In addition, the fiscal authorities audited the AMCs in one country while
the audit office of the banking association audited the numerous state-owned savings banks
in another. The practice of choosing the external auditors varied across countries and
institutions, with the appointing authorities being the AGM of the shareholders, by open
competition/public bidding, by the audit committee of the supervisory board from a list
approved by the central bank/bank supervisor, or by the owner. In the case of the AMCs, the
results were not being disclosed although the authorities agreed that the results should be
disclosed in principal at the right time. The report of the independent auditors was not
disclosed in many cases although some clarified that the opinion on the annual accounts was
disclosed without the report being disclosed.
Governance practices leave scope for improvement. The survey sought information on
some components of the governance structure and incentive systems in the SFIs—Does the
board include nongovernmental representatives? How is the institution’s chief executive
appointed? Under what conditions can the chief executive be removed? Are employees
compensated as regular government employees? How are managers compensated?
Several state-owned institutions (27 including 13 banks, 4 development banks and
3 commercial/development banks) did not have any form of nongovernment representation
on their boards. With a few exceptions, most of these were fully owned by the state.
However, there were also several (21) fully owned institutions which did have
nongovernmental representation on the board.
A wide variety of responses were received for the appointing authority for senior
management—the general assembly of the shareholders, the board of directors/supervisory
board/advisory board; the office of the president or prime minister or the governor of the
shareholder states; the ministry of finance or the concerned ministry; or by royal decree.
While in the case of commercial banks, the supervisor was almost always consulted prior to
the appointment of proposed senior managers, this was not often the case for development
banks (11 including 6 commercial cum development banks), for the general insurance
company, or the guarantee companies. Again, the appointment of chief executives was not
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often for a fixed term (11 banks, 7 development banks, 1 development/commercial bank,
2 DFIs, 3 insurance companies, and 3 of the funds). A few other SFIs reported that their chief
executive was appointed on a one year renewable term, while another stated that the chief
executive was by rotation from the board of directors for a one year term. In the case of one
postal bank, the chief executive was the ex-officio finance secretary.
In most cases, employees are not compensated like government employees. In the
discussion on the incentive systems that thwart the professionalization of public institutions,
and, hence, their performance, is the issue of how the employees and management of these
institutions are treated—like civil servants for their pay and terms of employment or like
their better paid, but less secure, private sector counterparts? The responses indicated that
while the employees of banks had their own (board determined; contracted, as private sector
workers; through collective wage agreement for entire banking sector; own wage agreement
authorized by government) compensation arrangements; in many (12) cases, the employees
of development and postal banks were compensated like government employees. However,
in some of these cases, the management was compensated more competitively (like private
company; performance criteria; advise by private consultants on the basis of market
conditions; fixed remuneration, etc,).
VI. CONCLUDING OBSERVATIONS
The purpose of this presentation has been to paint the landscape with regard to the diversity
in the SFI sector and to look at some explicit or covert structures which highlight the issues
surrounding state intervention in the financial sector. While no conclusive observations are
being drawn from the limited and idiosyncratic sample, the variety of institutions and
practices do suggest that there are several issues in the supervision and governance of these
institutions which need to be specifically addressed.
Should there, for instance, be a subset of supervisory standards that apply to banks and other
institutions in the public sector? Ideally, one would expect the standards applicable to the
industry be applied to all participants, but it is well recognized that there are certain features
arising out of state ownership that need to be kept in mind. In the case of commercial banks,
the Basel Core Principles, which are the standards for bank supervision, obliquely refer to the
application of the principles to these institutions in an Appendix, suggesting that “In
principle, all banks should be subject to the same operational and supervisory standards
regardless of their ownership; however, the unique nature of government-owned commercial
banks should be recognized”; then, it goes on to emphasize that they should be required to
“operate to the same high level of professional skill and discipline as required of privately
owned commercial banks,” and supervisors should “apply their methods in the same manner
to (these) institutions as they do to al other commercial banks.”
Yet, the issues faced by supervisors in such an environment would be the extent to which
they take into account the support of the government, which can keep technically insolvent
institutions open, so that the corrective action regime and the exit policy/resolution regimes
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for these institution would be different, as well as would the issue of implementing fit and
proper and licensing conditions.
The issues are more marked and varied for development banks and financial institutions; the
supervision of which may derive more from a fiscal imperative rather than a depositor
protection viewpoint. This picture becomes a bit clouded as we find development banks,
which have substantial retail deposits, commercial banks with very little retail deposits, and
nonbanks with high retail deposits. In addition, when an institution operates both as a
development bank and a commercial bank, managing the risks may be more challenging.
Developing a regulatory paradigm for both (a) deposit taking nonbanks and (b) non-deposit
taking development banks, development financial institutions and other nonbank credit
institutions would the be the next step in the process. At the same time, this paradigm should
also provide for the treatment of such of these institution, which are second tier institutions,
and provide refinance rather than direct finance.
A similar approach would have to be crafted for the insurance companies, which are subject
to either different standards or where compliance is with the treasury or administrative
ministry, and the mutual and other funds which are outside the supervisory scope of the usual
supervisors. As long as supervision of these various nonbank entities is with the different
ministries, their supervisors will suffer from both resource and independence issues. One
approach would be to bring them under an umbrella supervisor for SFIs; another would be to
integrate their supervision back with the supervisor for the sector to which they correspond
but with a subset or expanded set of standards applicable to them.
Irrespective of the approach taken for their supervision, improvement in the governance
structures of these institutions would have to be addressed as an environment in which the
state is the main stakeholder —as the owner, lender, borrower, shareholder, and sometimes
depositor; and where the supervisor and the auditor are also controlled by the state. In this
context, many of the recommendations regarding public sector governance, which were made
in the 4th conference in this series held in 2001 (Financial Sector Governance—The Roles of
the Public and Private Sectors), still remain center stage. As was stated in one of the
presentations, “The ultimate challenge, therefore, is to define a set of manageable public
sector governance practices that constrain the role of the public sector to its legitimate roles,
and that do so in such a way that mitigates the inefficiencies and conflicts that might still
arise, while minimizing the temptation for corruption.” (Carmichael 2002).
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References
Richard Hemming and Manal Fouad “Fiscal Transparency and Public Banks” in this volume
Barth, James R., Gerald Caprio, and Ross Levine, 2001, “The Regulation and Supervision of
Banks Around the World—A New Database” (World Bank: Washington, D.C.)
Carmaichael, Jeffery, 2002. “Public Sector Governance and the Finance Sector” in Financial
Sector Governance—The Roles of the Public and Private Sectors (Brookings
Institution Press: 2002)
International Monetary Fund “Toward a Framework for Financial Stability” 1998.
United States Government, Office of Management and Budget, “Analytical Perspectives,
Budget of the United States Government, Fiscal Year 2003”
http://www.whitehouse.gov/ omb/budget/fy2003/
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APPENDIX I
IMF Survey of State-Owned Financial Institutions
1. General Information
1.1
1.2
1.3
1.4
1.5
1.5(a)
1.5(b)
1.5(c)
1.5(d)
1.5(e)
1.5(f)
1.5(g)
1.5(h)
Name
Central government shareholding (as % of total)
State & local governments total shareholdings (as % of total)
Ratio of assets to GDP
Does this institution operate as a:
commercial bank
postal savings bank
development bank
international trade bank
mutual fund
insurance company
asset management/reconstruction company fund
other financial institution
2. Sources of funding as a percent of total assets
2.1
Retail deposits
2.2
Are these deposits explicitly guaranteed by the government?
2.3
Wholesale deposits including syndicated loans
2.4
Are these wholesale deposits or loans explicitly guaranteed
by the government?
2.5
Domestic marketable bonds, MTNs, or commercial paper
2.6
International bonds, MTNs or commercial paper
2.7
Are marketable bonds, MTNs or CP issues explicitly guaranteed
by the government?
2.8
Insurance or guarantee fees
2.9
Direct government grants
2.10
Long-term borrowing from the Treasury or Central Bank
2.11
Government deposits
2.12
Other
3. Recent performance and operating statistics
3.1
Return on assets prior year
3.2
Average return on assets over the prior 3 years
3.3
Profit or loss history over prior 3 years
3.3(a)
2002
3.3(b)
2001
3.3(c)
2000
3.4
Ratio of nonperforming assets to total assets
3.5
Ratio of provisions for non-performing assets to
nonperforming assets
3.6
Average percent of net profits transferred to government
4. Business/policy objectives
4.1
4.2
4.3
4.4
4.5
4.6
Originally established as public sector enterprise?
Originally private, subsequently acquired by government?
Law or decree authorizing institution
State institutional policy objective in authorizing/acquiring law
Is the institution intended to be run at a profit, at zero cost to the
government enterprise, or on a subsidized basis?
Percent of institution’s assets or activities devoted to:
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4.6(a)
4.6(b)
4.6(c)
4.6(d)
4.6(e)
4.6(f)
4.6(g)
4.6(h)
4.6(i)
APPENDIX I
agriculture
housing
industrial projects
SME specialized lending
micro finance institutions
import/export
other specialized finance
commercial lending to corporates
government bonds
5. Relationship with government
5.1
Legal minimum state ownership required by law
5.2
Receives annual/periodic government funds?
5.3
Receives annual/periodic policy target goals?
5.4
Is performance regularly monitored relative to policy targets?
5.5
By what agencies, ministries or organizations?
5.6
Are funds itemized in government budgets?
5.7
By what process are funds allocated?
5.8
Receives government funds only under infrequent special conditions?
5.8(a)
How are capital injections accomplished?
5.8(b)
Most recent capital injection date and amount
5.8(c)
Other prior capital injection dates and amounts
6. Supervision prudential standards
6.1
Is the institution subject to minimum prudential standards?
6.2
Minimum capital standard (discuss regulatory basis and level)
6.3
Maximum loan-to-value forms
6.4
Maximum indebtedness measure
6.5
Foreign exchange exposure limits
6.6
Market risk limits
6.7
Maximum total lending limits
6.8
Singe/group/related borrower limits with any exceptions
6.9
Limits on the use of derivatives
6.10
Maximum internal risk management guidelines
6.11
Rules for recognition of non-performing assets
6.12
Rules for minimum provisions required for non-performing assets
7. Authorizing legislation and prudential oversight
7.1
What laws or decrees authorize prudential standards?
7.2
Are privately owned institutions of similar character subject
to the same standards?
7.3
What supervisors or ministries monitor compliance with
these standards?
7.4
How is the supervisory agency funded?
7.5
How is the head of the supervisory agency appointed and
for what term?
7.6
In what circumstances can he/she be removed and by whom?
7.7
What is the range of corrective actions available to the supervisor?
7.8
Is the supervisor required to consult with the government before
initiating corrective action?
7.9
Is any exemption in compliance available to these institutions?
7.10
Is the supervisor consulted on the fitness and propriety of proposed
senior managers?
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7.11
7.12
APPENDIX I
What powers does the supervisor have to require changes
in investment or operating policies?
Does the supervisor have the power to recommend changes in
investments or operating policies?
8. Auditing and examination policies
8.1
Are regular inspections/examinations conducted by the supervisor?
8.2
Are regular audits required?
8.3
Who performs the audits?
8.4
How are the auditors selected?
8.5
Are the audit results publicly disclosed?
8.6
If so, how?
9. Governance policies
9.1
9.2
9.3
9.4
9.5
9.6
Does the board include non-governmental representatives
How is the institution’s chief executive appointed?
Does the executive serve for a fixed term?
Under what conditions can the chief executive be removed?
Are employees compensated as regular government employees?
How are managers compensated?
10. Other factors that merit consideration