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GFDR 2013: The Role of the State in Financial Infrastructure

GFDR 2013 Report

Chapter 5. The Role of the State in Financial Infrastructure

Chapter Highlights

  • The global financial crisis has highlighted the importance of a resilient financial infrastructure and reignited the debate on what role the state should play in its development, particularly in (a) promoting the availability and exchange of reliable credit information and (b) supporting the development of institutions to better manage counterparty risk in interbank markets and securities transactions.
  • Transparent credit information is a prerequisite for sound risk management and financial stability. However, due to the prevalence of monopoly rents in the market for credit information, information sharing among private lenders may not arise naturally. This creates an important rationale for the involvement of the state.
  • Existing credit reporting systems contain extensive information on credit risks in the financial sector. There is significant potential for improving their use for risk management and prudential supervision.
  • Many credit reporting systems cover only risks in the traditional financial sector. This limits their effectiveness in supporting credit market efficiency and stability. An important role of the state is to help extend the coverage of credit reporting systems to include nonregulated lenders, such as nonbank financial institutions and microfinance lenders, in existing credit reporting systems.
  • The state can help establish market infrastructure that helps to manage and mitigate counterparty risk. This includes robust large-value payment systems and, potentially, support for the development of collateralized interbank markets.
  • There is significant scope for state involvement in the development of a robust infrastructure for securities and derivatives settlements. The state can further reduce counterparty and settlement risks by monitoring these transactions and their clearing and settlement arrangements.

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