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GFDR 2013: Direct State Interventions

GFDR 2013 Report

Chapter 4. Direct State Interventions

Chapter Highlights

  • Lending by state-owned banks is less procyclical than lending by private banks, and some state banks played a countercyclical role during the global financial crisis. However, this lending did not always target the most constrained borrowers and continued even after economic recovery ensued, questioning the effectiveness of the policy. Furthermore, the evidence based on previous episodes of downturns and recoveries is mixed.
  • Moreover, research finds that efforts to stabilize aggregate credit by state-owned banks come at a cost, particularly through the deterioration of the quality of intermediation and resource misallocation. This effect undermines the benefits of using state banks as a countercyclical tool.
  • The empirical evidence largely suggests that government bank ownership is associated with lower levels of financial development and slower economic growth. Policy makers need to avoid the inefficiencies associated with government bank ownership by paying special attention to the governance of these institutions and ensuring, among other things, that adequate risk management processes are in place, which is particularly challenging in weak institutional environments.
  • Another popular form of intervention during the recent crisis was through credit guarantee programs. Rigorous evaluations of these programs are rare, but existing studies suggest that the benefits are modest and costs are often significant. Success hinges on overcoming the challenges of getting the design right, particularly in underdeveloped institutional and legal settings.

PDF file Read more about this chapter…| Box 4.3 Supporting Note

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