OED Review of Bank Assistance

to the Financial Sector

Finance Forum, September 2004

Overview of presentation

Description of Bank lending for financial sector reform over past ten years

Framework of OED evaluation Loans and credits: analysis of outcome Country level: analysis of outputs Country level: analysis of outcomes Country level: analysis of impact Conclusions

Bank lending classified as finance as a percent of total Bank commitments, FY93-03

0%

5%

10%

15%

20%

25%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

perc

en

t o

f to

tal co

mm

itm

en

t

Adjustment Investment Crisis

Bank loans supporting financial sector reforms, as percent

of total Bank loans approved each year, FY93-03

0%

2%

4%

6%

8%

10%

12%

14%

16%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

perc

ent o

f tot

al p

roje

cts

appr

oved

classif ied as f inance classif ied under other sectors

Focus of reforms as percent of all Bank

projects with financial sector components

0%

10%20%

30%

40%50%

60%

70%

80%90%

100%

Regulationand

Legislation

Supervision Restructuringand

Privatization

CapitalMarkets

Insurance

pe

rce

nt o

f pro

ject

s w

ith fi

na

nci

al s

ect

or

com

po

ne

nt

banking and bank-like financial institutions

non-banking financial institutions

Lending with financial sector components

0

2

4

6

8

10

12

14

16

18

AFR EAP ECA LCR MNA SAR

perc

ent o

f reg

iona

l pro

ject

s

69

29

99

59

14

10

number of projects

Restructuring and Privatization of Banks Supported by Adjustment and TA Loansupdated 08/17/04

Restructuring of banks supported by WB lending

Privatization of banks supported by WB lending

Restructuring of banks supported by WB lending followed by privatization

Framework for OED’s evaluationLogical chain for financial sector development

World Bank

Activities

GovernanceLegal/RegulatoryInstitutions

Market structureEfficiencyHealth

Depth Access

Stability

Inputs Outputs Outcomes Impact

Exogenous factorsExogenous factors

Financial sector adjustment loansOutcomes, FY93-03

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

by Project No. by Net Commitments

perc

ent s

atis

fact

ory

Financial Sector Adjustment Lending

All Adjustment Lending (excluding f inancial sector)

Financial sector TA loansOutcomes, FY93-03

0%

20%

40%

60%

80%

100%

by Project No. by Net Commitments

perc

ent s

atis

fact

ory

Financial Sector TA and Other Investment loansAll TA Loans All Investment Loans(excluding TA)

Financial sector loans and financial components of multi-sector loans, Outcomes, FY93-03,

0%

20%

40%

60%

80%

100%

perc

ent s

atis

fact

ory

by n

umbe

r

Financial Sector Loans

Financial Components of Multisector Loans

Adjustment TA

43 99 17 35

Number of projects rated

Outcomes of financial sector versus financial components of multi-sector loans, by country characteristic, FY93-03

*statistically significant

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

perc

ent s

atis

fact

ory

by n

umbe

r

Financial Sector LoansFinancial Components of Multisector Loans

Low Income Middle Income

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

perc

ent s

atis

fact

ory

by n

umbe

r

Financial Sector LoansFinancial Components of Multisector Loans

Low CPIA countries* High CPIA countries*

Summary of lending outcomes: Part I• Loans classified under the Financial sector have

significantly better outcomes than financial sector components of multi-sector loans

• Reason may be greater focus within Bank on preparation and supervision; or greater focus within country by counterparts; or combination

• Conclusion points to need for better oversight within Bank and to find financial sector champion within client country to focus on reform agenda

Outcomes of all lending in support of financial sector reforms, by country characteristics

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Low CPIA High CPIA Transition

perc

ent s

atis

fact

ory

by n

umbe

r

2003 CPIA Rating

0%10%

20%30%

40%50%

60%70%

80%90%

100%

Low Income MiddleIncome

perc

ent s

atis

fact

ory

by n

umbe

r

2002 income per capita

Outcome ratings, timing, sequence

*statistically significant

0%10%20%

30%40%50%60%70%

80%90%

100%

FY93-FY97 FY98-FY03perc

ent s

atis

fact

ory

by n

umbe

r

Year of approval

0%10%20%30%40%50%60%70%80%90%

100%

First loan Not firstloan

perc

ent s

atis

fact

ory

by n

umbe

r

Sequence*

Outcome ratings of adjustment loans with and without accompanying TA loans

0%

20%

40%

60%

80%

100%

w ith TA loans w ithout TAloans

perc

ent s

atis

fact

ory

of a

djus

tmen

t loa

ns

by income level

0%10%

20%30%

40%50%

60%70%

80%90%

100%

Low Middle Transition

perc

ent s

atis

fact

ory

by n

umbe

r

w ith TA w ithout TA

Outcome ratings of adjustment loans with and without accompanying TA loans

*statistically significant

by CPIA*

0%

20%

40%

60%

80%

100%

Low CPIA High CPIA Transition pe

rce

nt s

atis

fact

ory

by

nu

mb

er

with TA without TA

Summary of lending outcomes: Part II• Second and third loans addressing financial reforms have

better results than first loans

• Perseverance may pay off in terms of outcomes

• TA loans can help achieve objectives in low capacity countries

• In higher capacity countries, presence of TA loan may signal other problems (lack of commitment??)

Outputs at country level: ownership of banks, with and without Bank lending for privatization

• In spite of numbers, far from complete: data mask extent of government involvement in “private” banks and bank-like institutions

• Wide variations among Bank clients

0102030405060708090

100

w ith Bank lendingfor privatization

w ithout Banklending for

privatization

OECD countries

*Latest year available

govern

ment-

ow

ned b

anks a

s %

of

bankin

g s

yste

m's

assets

1991-1993*

1991-1993*

1999-2002*1999-2002*

2003

Further findings on privatization• Quality matters: Bank needs to engage in process

– Examples in ECA of Bank support for privatization of banks to former SOEs; or to inappropriate owners (Mexico, Mozambique)

• Financial restructuring prior to privatization: better outcomes– Asset Management Companies – mixed experience, but

seem to work best when they have special legal powers to collect loans

– Credit ceilings don’t work, or not for long• Other forms of bank restructuring: little systematic

evidence that downsizing or twinning is necessary; may be in selected cases

• Restructuring without privatization: seldom successful (Bank supported this in Albania, Ghana, Guinea, Lao PDR, others)

Outputs at a country level: Legal and regulatory changes• Difficult to measure legal and regulatory changes

– No one measure captures legal and regulatory framework

– Beyond passage of laws, implementation even more difficult to measure

• Example: prudential regulations– Example: Capital adequacy requirements in borrowing

countries changed little between 1998 and 2003, changed more in Bank client countries that did not borrow

– Example: loan loss classification and provisioning: changed very little between 1998 and 2003 in borrowing countries, similarly in non-borrowers

Outputs at a country level: Legal and regulatory changesExample: Deposit insurance

• Bank supported creation or reform of deposit insurance schemes in 35 countries with a total of 60 operations between FY93-03

• Out of 15 countries where creation of deposit insurance schemes were supported and loans are now closed, ICRs mention only that schemes were set up or studies carried out, but there is no information on quality, functioning, or impact of schemes.

Outputs at a country level: Summary • Over half of Bank support to the financial sector has been

directed at banking restructuring and privatization

• Data show generally successful outputs, although agenda in this area is far from complete

• Over half of Bank support to the financial sector has also been directed at legal and regulatory reforms and only slightly less to strengthening banking supervision.

• Too little is known about the outputs of Bank support in these areas; more needs to be done to develop measures for tracking the de jure changes as well as the de facto changes (implementation).

Outcomes at country levelChanges in bank concentration, 1993-2001

• Countries that borrowed for financial reforms reduced concentration significantly more than Bank clients that didn’t borrow, after country factors (growth rates, inflation rates, CPIA) taken into account

• Borrowing countries are approaching or exceeding concentration levels of OECD, but…

0

10

20

30

40

50

60

70

80

90

100

Small SystemBorrow ing Countries

Large SystemBorrow ing Countries

OECD countries

Assets

of th

ree larg

est banks a

s a

share

of assets

of all

com

merc

ial banks in the s

yste

m

1993

19932001

2001

1993

2001

Outcomes at country level changes in interest rate spreads, 1992-2002

• …many small systems among Bank borrowers remain inefficient, with wide interest rate spreads

• But, when country factors taken into account, the decrease in interest rate spreads over the period was significant; in Bank clients that didn’t borrow, spreads didn’t go down.

Median

0

5

10

15

20

25

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Inte

rest ra

te s

pre

ad, %

Large System Borrow ing CountriesSmall System Borrow ing CountriesOECD Countires

Outcomes at a country level: health of financial sectorHealth of financial sector (banks) proved hard to track:

– Little consistent data over ten year period

– Definitions vary

– Health measures can increase precipitously (NPLs lifted off banks’ books), without change in underlying dynamics

Nevertheless, trends mostly good– NPLs moved in right direction for 14 out of 21 countries

with information in the past five years

– Capital adequacy increased in last five years in 22 out of 33 borrowing countries with information; and by more than in non-borrowing Bank clients

– Profitability (ROA and ROE) showed no trend across 47 borrowing countries with information

Outcomes at a country level: Summary• On all measures – market structure, efficiency, health –

trends are in right direction

• For market structure and efficiency, econometric results show that countries that borrowed from the Bank for financial sector reforms did better than countries that didn’t borrow from the Bank

• For financial sector health, data over last five years indicate that countries that borrowed for financial reforms did at least as well in improving health as Bank client countries that didn’t borrow

Impact at country level, financial sector depth and public confidence

Taking country factors into account:M2/GDP Cash + DD/M2---------annual growth rates-----------------

With Bank lending 1.01* -0.96*Without Bank lending 0.76* -0.11

*significantly different from zero at 1 percent level of confidence

0102030405060708090

100

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

M2 a

s %

of G

DP

Bank Borrow ers OECD Countries

010

2030

4050

6070

8090

100

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Cash a

nd D

em

and D

eposits

as %

of M

2

Bank Borrow ers OECD Countries

Impact at country level, access to credit

Taking country factors into account:

Private credit/GDP

annual growth rates

With Bank lending 0.64*

Without Bank lending 1.02*

*significantly different from zero at 1 percent level of confidence

0

20

40

60

80

100

120

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

dom

estic c

redit to p

rivate

secto

r as %

of G

DP

Bank Borrow ers OECD Countries

Impact at country level, financial sector stability

• Examined countries included in data base of Caprio and Klingebiel systemic and borderline financial crises: bias toward weaker countries

• Among these countries, no pattern emerged among countries that borrowed from Bank for financial reforms and those that didn’t

Countries without systemic instability Number of Countries

Countries that didn’t borrow from Bank 9

Borrowed from Bank 18

Countries with systemic instability

Countries that didn’t borrow from Bank 13

Borrowed during instability and improved 15

Borrowed during instability but didn’t improve 23

Borrowed and instability followed 2

Impact at a country level: Summary• Countries that borrowed from the Bank for financial

sector reforms experienced a small but statistically significant improvement in financial sector depth, public confidence, and access to credit

• In some respects, the borrowing countries did better than Bank clients that did not borrow for financial reforms, for example, in public confidence in the banking system

• BUT, these measures of financial sector development remain very low in borrowing countries, in some cases more than ten years later and after multiple loans (with satisfactory outcome ratings at the loan level)

Summary of general findings

• Large, unfinished agenda for financial sector reforms, even in areas where there has been considerable progress, such as banking privatization

• Given limited progress on impact (financial sector development) after more than ten years, Bank needs to be more realistic in its financial sector reform objectives and/or on length of time for achieving them

• Involve financial sector more in oversight and quality control of reforms in multi-sector operations

• Bank needs to become more involved in implementation of reforms (including privatization process), beyond passage of laws

OED Review of Bank Assistance

to the Financial Sector