Notes on Financial System Development and Political Intervention

We study the impact of political intervention on a financial system that consists of banks and financial markets and develops over time. In this financial system, banks and markets exhibit three forms of interaction: they compete, they complement each other, and they co-evolve. Co-evolution is gener...

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Main Authors:	Song, Fenghua, Thakor, Anjan
Format:	Journal Article
Language:	en_US
Published:	Oxford University Press on behalf of the World Bank 2015
Subjects:	banking capital markets access to credit financial development financial innovation financial institutions financial intermediaries financial system lending regulation credit availability political intervention
Online Access:	http://hdl.handle.net/10986/21619

id	okr-10986-21619
recordtype	oai_dc
spelling	okr-10986-216192021-04-23T14:04:03Z Notes on Financial System Development and Political Intervention Song, Fenghua Thakor, Anjan banking capital markets access to credit financial development financial innovation financial institutions financial intermediaries financial system lending regulation credit availability political intervention We study the impact of political intervention on a financial system that consists of banks and financial markets and develops over time. In this financial system, banks and markets exhibit three forms of interaction: they compete, they complement each other, and they co-evolve. Co-evolution is generated by two new ingredients of financial system architecture relative to the existing theories: securitization and risk-sensitive bank capital. We show that securitization propagates banking advances to the financial market, permitting market evolution to be driven by bank evolution, and market advances are transmitted to banks through bank capital. We then examine how politicians determine the nature of political intervention designed to expand credit availability. We find that political intervention in banking exhibits a U-shaped pattern, where it is most notable in the early stage of financial system development (through bank capital subsidy in exchange for state ownership of banks) and in the advanced stage (through direct lending regulation). Despite expanding credit access, political intervention results in an increase in financial system risk and does not contribute to financial system evolution. Numerous policy implications are drawn out. 2015-03-18T22:23:33Z 2015-03-18T22:23:33Z 2013-09 Journal Article World Bank Economic Review 1564-698X http://hdl.handle.net/10986/21619 en_US CC BY-NC-ND 3.0 IGO http://creativecommons.org/licenses/by-nc-nd/3.0/igo World Bank Oxford University Press on behalf of the World Bank Publications & Research Publications & Research :: Journal Article
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	en_US
topic	banking capital markets access to credit financial development financial innovation financial institutions financial intermediaries financial system lending regulation credit availability political intervention
spellingShingle	banking capital markets access to credit financial development financial innovation financial institutions financial intermediaries financial system lending regulation credit availability political intervention Song, Fenghua Thakor, Anjan Notes on Financial System Development and Political Intervention
description	We study the impact of political intervention on a financial system that consists of banks and financial markets and develops over time. In this financial system, banks and markets exhibit three forms of interaction: they compete, they complement each other, and they co-evolve. Co-evolution is generated by two new ingredients of financial system architecture relative to the existing theories: securitization and risk-sensitive bank capital. We show that securitization propagates banking advances to the financial market, permitting market evolution to be driven by bank evolution, and market advances are transmitted to banks through bank capital. We then examine how politicians determine the nature of political intervention designed to expand credit availability. We find that political intervention in banking exhibits a U-shaped pattern, where it is most notable in the early stage of financial system development (through bank capital subsidy in exchange for state ownership of banks) and in the advanced stage (through direct lending regulation). Despite expanding credit access, political intervention results in an increase in financial system risk and does not contribute to financial system evolution. Numerous policy implications are drawn out.
format	Journal Article
author	Song, Fenghua Thakor, Anjan
author_facet	Song, Fenghua Thakor, Anjan
author_sort	Song, Fenghua
title	Notes on Financial System Development and Political Intervention
title_short	Notes on Financial System Development and Political Intervention
title_full	Notes on Financial System Development and Political Intervention
title_fullStr	Notes on Financial System Development and Political Intervention
title_full_unstemmed	Notes on Financial System Development and Political Intervention
title_sort	notes on financial system development and political intervention
publisher	Oxford University Press on behalf of the World Bank
publishDate	2015
url	http://hdl.handle.net/10986/21619
_version_	1764448788434386944

Notes on Financial System Development and Political Intervention

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