Financial Systems of Developed countries
Deepening and broadening of financial access should be an important public policy objective. Better financial access translates into robust economic growth, as more firms are able to make profitable investments. It also enhances financial stability, For example, companies may hedge their risks or receive refinancing more readily if they are in financial difficulties. Finally, increased access to finance reflects the principles of social justice by promoting equitable economic opportunity.
To achieve a fundamental improvement in financial access, public policy should focus on the major determinants: institutional and financial system development.
The key institutional features are clear commercial property rights, effective contract enforcement, collateral pledging and claiming processes, bankruptcy procedures, and investor protection and corporate governance systems.
An atmosphere that promotes openness, including sufficient accounting norms and other tools for trustworthy disclosure.
The key dimensions of the financial system include effective regulation and supervision, a clear ownership structure for financial institutions, and a degree of foreign ownership that reflects country-specific benefits and costs.
Controls for the detrimental impacts of bank-industry cross-ownership.
Financial institutions should have an entry and competition policy that balances opportunities with preserving their charter value. They should also have crisis resolution tools like deposit insurance, liquidity support mechanisms, and effective bankruptcy procedures, as well as financial infrastructure like payment systems and credit databases.
Institutional and financial system development policies are required to ensure a significant increase in financial access and should thus be prioritized. However, there may be many issues with their implementation. For starters, even the strongest basic development strategies, particularly those aimed at improving institutional capacity, may have lengthy gestation periods. The government may need to supply more rapid interim remedies. Second, there may be true market failures that limit access to credit, which cannot be addressed by changing the broader economic climate and may need more specific and direct government interventions.
When core financial access policies fail due to extended gestation, true market problems, or political resistance, governments may decide to compensate for a lack of market-based financing by providing missing financial services via the public sector. Undoubtedly, well-planned interventions by a “noble” and efficient government may give temporary remedies to complement long-term development strategies and address financial market failings. However, in actuality, governments are often not totally “noble,” but rather swayed by private interests. Bureaucratic incentive systems are another prominent source of government inefficiency.
As a consequence, even when market failures provide a theoretical foundation for social welfare-improving measures, real government failings may be more distorting than the market flaws they were designed to solve, making public participation unappealing. To put it another way, market failures alone do not justify government intervention. Recognizing its limits, the government should only intervene if it can handle economic imperfections better than the market. In reality, however, governments throughout the globe are often too interventionist, resulting in measures that compromise rather than promote societal wellbeing.
Regulatory Perspective
Despite the known risks and costs, public financial institutions play an essential role in the global financial environment. Public financial institutions are often linked with emerging nations, which resort to them when their expanding real sector potential seems to outstrip finance system capacity. In actuality, however, public financial institutions exist and are often visible, even in the most financially developed nations.
The formation of government financial services is usually a political choice over which financial regulators may have little influence. As a result, they accept the choice to create, preserve, or liquidate public financial institutions as given. The key issue is how regulators should handle such judgments. The approach should aim to maximize the advantages of increased financial access while also identifying and