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IMF Survey of Supervision of State- owned Enterprises in the Financial Sector David Marston International Monetary Fund April 26, 2004

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3 Survey Coverage All ‘state owned’ financial institutions –commercial and specialized/ development banks and non-banks, insurance/guarantee cos., mutual, investment, provident and pension funds etc. ‘State owned’ –any shareholding arrangement by which the state (central, state or local or other elected body) or any entity of the state has a controlling ownership interest or a minority that allows the state to exercise management control

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Page 1: IMF Survey of Supervision of State-owned Enterprises in the Financial Sector David Marston International Monetary Fund April 26, 2004

IMF Survey of Supervision of State-owned Enterprises in the

Financial Sector

David MarstonInternational Monetary Fund

April 26, 2004

Page 2: IMF Survey of Supervision of State-owned Enterprises in the Financial Sector David Marston International Monetary Fund April 26, 2004

2

Survey Objectives

• Context• Accept the landscape-manage the risks• Ensure that IMF recommendations reflect

“good practice” in supervision • Initiate a research agenda aimed at

developing “good practice” guidelines for the operation, oversight, and transparency of state owned financial enterprises.

Page 3: IMF Survey of Supervision of State-owned Enterprises in the Financial Sector David Marston International Monetary Fund April 26, 2004

3

Survey Coverage

• All ‘state owned’ financial institutions– commercial and specialized/ development banks and

non-banks, insurance/guarantee cos., mutual, investment, provident and pension funds etc.

• ‘State owned’ – any shareholding arrangement by which the state

(central, state or local or other elected body) or any entity of the state has a controlling ownership interest or a minority that allows the state to exercise management control

Page 4: IMF Survey of Supervision of State-owned Enterprises in the Financial Sector David Marston International Monetary Fund April 26, 2004

4

Survey Design

• Types of institutions and activities• Ownership structures• Policy goals• Funding arrangements• Supervision and oversight • Governance arrangements

Page 5: IMF Survey of Supervision of State-owned Enterprises in the Financial Sector David Marston International Monetary Fund April 26, 2004

5

Caveats

• Work in progress – responses still coming • Default sample• Incomplete responses• Factors inhibiting response

– Apprehension of privatization agenda– Touchy subject – No single agency has this information– Lack of clarity

Page 6: IMF Survey of Supervision of State-owned Enterprises in the Financial Sector David Marston International Monetary Fund April 26, 2004

6

Survey Response• 25 countries ( 10 developed, 3 transition and 13

developing) reported 683 SOFIs. 2 nil responses.

• Individual data provided for 101 institutions, aggregate data for the rest.

• SOFIs – are prevalent in many areas of financial activity, though

commercial banking is dominant – are present in both the developed and developing countries– can have a significant size

Page 7: IMF Survey of Supervision of State-owned Enterprises in the Financial Sector David Marston International Monetary Fund April 26, 2004

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State financial institutions are set up to meet policy goals

• Nationalization or takeover of private institutions is not common.

• In most cases, SOFIs set up with the intention of • benefit of a particular region, particular trade or activity

(SME, artisan, tradesmen) or agriculture, trade, encouragement of thrift, housing, collection of judicial deposits, (banks),

• infrastructure, general economic development, middle and low income housing, international trade, (development banks)

• health insurance, retirement schemes (funds).

Page 8: IMF Survey of Supervision of State-owned Enterprises in the Financial Sector David Marston International Monetary Fund April 26, 2004

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Banks dominate the SOFI landscape

Commercial Banks Universal BanksDevelopment Banks Combo BanksPostal Banks DFIsNon Bank Credit Leasing CompanyECA Insurance cos.Mutual Funds AMCsInvestment Cos. Pension Funds

Page 9: IMF Survey of Supervision of State-owned Enterprises in the Financial Sector David Marston International Monetary Fund April 26, 2004

9

The state tends to have a majority ownership in SOFIs

0

20

40

60

80

CentralGovernment

State and LocalGovernment

Ownership of SOFIs (% )

Full 100%

Majority 51-99%

Significant 21-50%

Insignificant 0-20 %

Page 10: IMF Survey of Supervision of State-owned Enterprises in the Financial Sector David Marston International Monetary Fund April 26, 2004

10

State ownership in the financial sector can be significant

0

2

4

6

8

10

No.

of c

ount

ries

1

Size of SOFI sector (as % of GDP)

0-10%

10-50%

50-100%

>100%

Page 11: IMF Survey of Supervision of State-owned Enterprises in the Financial Sector David Marston International Monetary Fund April 26, 2004

11

State Institutions Receive Funding from a Variety of Sources

• Retail and wholesale deposits• Direct government grants • Government deposits • Long term borrowings• Explicit liability guarantees• Inclusion in the budget

Page 12: IMF Survey of Supervision of State-owned Enterprises in the Financial Sector David Marston International Monetary Fund April 26, 2004

12

State Institutions Typically Operate at a Loss

• Most institutions are ‘for profit’• A few operate on a ‘zero-cost’ basis.• However,

– 1/3rd reported a loss in 1 of 3 years– Capital injections into these institutions

are not uncommon

Page 13: IMF Survey of Supervision of State-owned Enterprises in the Financial Sector David Marston International Monetary Fund April 26, 2004

13

Most “for Profit” & “Zero Cost” Institutions Operate at a Loss

FOR PROFIT ZERO COST

Number 71 11 @Losses in past three years

18 (25%) 6 (55%)

Capital injections in previous periods

41 (58%) 10 (90%)

(@excludes 24 guarantee companies run on zero cost basis which reported losses on an aggregated basis)

Page 14: IMF Survey of Supervision of State-owned Enterprises in the Financial Sector David Marston International Monetary Fund April 26, 2004

14

Does moral hazard of access to deep pockets cause higher NPLs ?

NPLs reported by SOFIs

0

5

10

15

20

25

30

1

Num

ber

0-5%5-10%10-20%20-50%.>50%

Page 15: IMF Survey of Supervision of State-owned Enterprises in the Financial Sector David Marston International Monetary Fund April 26, 2004

15

Issues in competition

• Legal requirement for continuing with govt ownership is rare

• Most institutions receive direct policy targets from government which are monitored regularly

• Lending to government is not very significant

Page 16: IMF Survey of Supervision of State-owned Enterprises in the Financial Sector David Marston International Monetary Fund April 26, 2004

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Most institutions are supervised...

• Most institutions are subject to some form of third party supervision

• Loose convergence of supervisory approaches - development banks subject to supervision / regulation similar to commercial banks.

• However, compliance with regulations is monitored by the administrative ministry in some cases.

Page 17: IMF Survey of Supervision of State-owned Enterprises in the Financial Sector David Marston International Monetary Fund April 26, 2004

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But supervision may not be effective.

• Further, supervisory standards could differ between state owned enterprises and their private sector counterparts.

• Corrective action is not available in the case of certain supervised institutions.

• Where available, supervisors may have to ‘consult’ with the government before taking corrective action.

Page 18: IMF Survey of Supervision of State-owned Enterprises in the Financial Sector David Marston International Monetary Fund April 26, 2004

18

Issues in governance

• Composition of the Board• Appointment and term of chief executives • Compensation of employees • Audit policies and procedures

Page 19: IMF Survey of Supervision of State-owned Enterprises in the Financial Sector David Marston International Monetary Fund April 26, 2004

19

Regulatory paradigms

• Public – Private • Commercial bank – Policy bank

• Deposit taker– non Deposit taker

• Financing institution – Refinancing institution

• Bank – Non bank

Page 20: IMF Survey of Supervision of State-owned Enterprises in the Financial Sector David Marston International Monetary Fund April 26, 2004

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Thank you