IMF Survey of Supervision of State-owned Enterprises in the

Financial Sector

David MarstonInternational Monetary Fund

April 26, 2004

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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.

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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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Survey Design

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

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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

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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

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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).

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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

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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 %

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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%

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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

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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

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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)

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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%

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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

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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.

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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.

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Issues in governance

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

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Regulatory paradigms

• Public – Private • Commercial bank – Policy bank

• Deposit taker– non Deposit taker

• Financing institution – Refinancing institution

• Bank – Non bank

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Thank you