0 Financial Development in LAC The Road Ahead 2011 Regional Flagship Launch Central Bank of Brazil...

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Financial Development in LACThe Road Ahead

2011 Regional Flagship Launch

Central Bank of BrazilMarch 22, 2012

Chief Economist OfficeLatin America and the CaribbeanThe World Bank

Structure of the Report

Financial development Frictions, failures, paradigms Bright and dark sides Patterns and paths

Where does LAC stand? Domestic FD Financial globalization Financial inclusion

Developmental issues The banking gap The equity gap Going long Risk absorption by the state

Prudential oversight Where is LAC? The new agenda

• Macro-prudential policy• Micro-systemic regulation• Systemic supervision

Introduction

Where does LAC stand with respect to financial development? Financial deepening, irrespective of financial stability

How is financial development related to financial globalization? Use of international markets (offshorization)

Basic trends here Latin America centered, with lessons and evidence on other EMs

Given time constraints, some scattered evidence presented

The report has many more details for the interested readers

Policy discussion

Bird’s-eye view, showing stock-taking exercise Broad and systematic comparisons across selected countries and regions Mostly over the past two decades

Several comparisons shed new light to different observers Problem of benchmarking

Before/after analysis? Developed countries? Which ones? US? Germany? Others non-core? Which regions and countries among developing ones? Which controls?

Introduction

Focus on domestic financial development Compare to globalization process

Essential given large extent of globalization And nature of financial intermediation in integrated markets

Focus on banks and capital markets (bond and equity markets) Main focus on firms, but shed light on borrowers and creditors Different indicators

Standard (e.g., over GDP) and relative sizes of different markets With and without controls Indicators capturing the changing nature of financing Illustrate issues like currency and maturity composition, liquidity,

concentration, firms’ access to finance

Introduction

Mixed, nuanced picture from all the data: no linear story Financial systems developed over the last two decades Also became significantly more complex From a mostly bank-based model to a more complete and

interconnected model Non-bank markets (bonds and equities) increased in absolute and

relative size New markets also developing Non-bank institutional investors now play more central role The number and sophistication of participants (including cross-border

investors) increasing Banks connected to capital markets and institutional investors

Summary of Findings

Nature of financing also changing, slowly In general, towards the better

Increased maturity of bonds (both private and public sectors in domestic and foreign markets)

Decline in the extent of dollarization of loans and bonds Even some issues of local currency bonds in foreign markets

Local developments paired by two-way internationalization Big chunk of globalization/offshorization happened in the 1990s But now, safer integration

EMs net creditors in debt and net debtors in equity

Different stories for bond and equity markets Bonds domestically and equity abroad

Summary of Findings

Despite all new developments, large heterogeneity across regions and countries No convergence yet – advanced economies developed even more Though different stories across regions, some general trends Many of the improvements centered in certain areas, and countries

Many shortcomings in several important EMs Bank credit stagnated in various countries Firm financing from banks decreased in relative terms Bond markets expanded, but with limitations In banks and bonds, public sector still captures significant share Equity markets still small, illiquid, and concentrated in large firms Institutional investors sophisticated and large in several countries, but

with much more limited role than previously thought

Summary of Findings

Far away from model of dispersed ownership and participation

Supply versus demand effects Constraints not on lack of available funds: domestic & foreign savers

Many assets available for investment not purchased by institutional investors or foreigners, which hold large resources

Institutional investors seem to shy away from risk

Incentives to banks to move first into relatively easy markets (consumer, leasing, services), after big corporations left to capital markets

Incentives to asset managers and the overall functioning of financial systems does not contribute to expectations

Implications of Findings

Many firms not becoming public or not accessing markets Capital markets service only few firms, with increasing concentration

domestically and abroad Substantial financing through retained earnings and banks

Regulations do not seem to be the main obstacle Several challenges ahead

Growing savings Role of financial intermediaries Need for more risk taking paired with stability Spillovers to all firms Need to catch up Complexities and interconnectedness

Implications of Findings

Structure of the Financial System

Size of Domestic Financial System

Relative Size: All Increased, But No Catch Up

Source: IFS, BIS, and WDI

1990

-9

2000

-9

1990

-9

2000

-9

1990

-9

2000

-9

1990

-9

2000

-9

1990

-9

2000

-9

1990

-9

2000

-9

1990

-9

2000

-9

1990

-9

2000

-9

Asia (5) China Eastern Europe (2)

G7 (5) India LAC7 (6) Oth. Adv. Economies

(4)

Brazil

0%

50%

100%

150%

200%

250%

300%

350%

83% 84% 95%128%

51% 50%

97%123%

36%60%

39% 44%80%

105%

59% 73%

36%56%

8%

36%

17%43%

92%

104%

20%

35%

20%33%

52%

59%

43%

60%

77%66%

13%

66%

13%

31%

69%

89%

32%

62%

28%

42%

54%

85%

22%

51%

Banks Bonds Equities%

of G

DP

LAC7

Markets Outstanding Liabilities

Assets Held

Markets Outstanding Liabilities

Assets Held

2000-2003 2004-2007

0%

20%

40%

60%

80%

100%

120%

140%

Banks45% Govt

35%PF

14%

Banks41% Govt

36% PF19%

Bonds31%

Corp.65%

MF 7%

Bonds34%

Corp.77%

MF 9%

Equity34%

Househ.10%

IC 4%

Equity49%

Househ.10%

IC 5%

Banks45%

Banks41%

Frgn.57%

Frgn.48%

% o

f GDP

Structure of Domestic Financial Systems

Source: Lane and Milesi-Ferretti (2007), IFS, BIS, WDI, EMBD, ICI, ASSAL, AIOS, and local sources

Banks

Private Bank Claims

Banks: Uneven Evolution

Numbers in parentheses next to region names represent the number of countries included in the graphs. Source: IMF’s IFS

Asia (5) China Eastern Europe (3)

G7 (5) India LAC7 (6) Oth. Adv. Economies

(6)

Brazil0%

20%

40%

60%

80%

100%

120%

140%

44%

73%

31%

65%

24%29%

58%55%

76%

93%

23%

82%

24%29%

72%

56%

71%

117%

34%

107%

40%

30%

100%

38%

1980-1989 1990-1999 2000-2009

% o

f GD

P

Credit Composition

Banks: Relative Decline in Corporate Lending

Source: Local sources

2000

-03

2004

-07

2008

-09

2000

-03

2004

-07

2008

-09

2000

-03

2004

-07

2008

-09

2000

-03

2004

-07

2008

-09

2000

-03

2004

-07

2008

-09

2000

-03

2004

-07

2008

-09

China Eastern Europe (2)

G7 (2) LAC7 (6) Oth. Adv. Economies (3)

Brazil

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

40%31%

25%

49%41%

34%

45% 42% 43%

66%62% 60%

48% 48% 50%

67% 63% 61%

37%51%

58%

34%40%

49%

43% 47% 47%

19%

14%14%

43% 43% 42% 10%

5% 6%

22% 19% 17% 17% 18% 18%11% 10% 10%

14%24% 26%

9% 9% 8%

23%32% 33%

Commercial Mortgage Personal

% o

f Tot

al C

red

it

Banks: Not Closing the Gap

Note: Controls used are GDP per capita, population size and density, young and old age dependency ratios, a financial offshore center dummy, a transition country dummy, and a large fuel exporter dummy.

-40

-30

-20

-10

0

10

20

30

40

5019

84

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Asia Eastern Europe G7 LAC-7 Other Advanced Economies

Private Credit over GDP (Residuals)

53%

17%

15%

15%

Banks Retailers Family Comp. Funds and Cooperatives Others

Consumer Debt in Chile

Retail Stores: Hold Significant Fraction of Debt

Source: Matus et al. (2010)

Access: But Considerably More Expensive

Median Checking and Savings Accounts Annual Fees (% of GDP per capita)

LAC7 Asia China India Eastern Europe

G7 Oth. Adv. Economies

Brazil0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.4%

0.7%

0.0% 0.0%

0.2% 0.2%

0.1%

0.8%

0.5%

0.3%

0.0%

0.2%

0.0% 0.0% 0.0% 0.0%

Annual fees checking account Annual fees savings account

% o

f GD

P

Bond Markets

Composition of Bond Markets, % of GDP

Bond Markets Have Expanded, But Public Sector Still Large and Growing

Source: BIS

1990

-9

2000

-9

1990

-9

2000

-9

1990

-9

2000

-9

1990

-9

2000

-9

1990

-9

2000

-9

1990

-9

2000

-9

1990

-9

2000

-9

1990

-9

2000

-9

Asia (5) China Eastern Europe (2)

G7 (7) India LAC7 (7) Oth. Adv. Economies

(5)

Brazil

0%

20%

40%

60%

80%

100%

120%

16%24%

4%13%

2% 4%

41%48%

1% 2% 5% 10%

30%40%

11% 15%

20%

32%

4%

23%

14%

40%

52%

65%

19%

33%15%

23%

31%24%

33%

45%

Private Bonds Public Bonds%

of G

DP

Bond Value Trading as % of Total Bond Market Capitalization

Bond Market Turnover Not on the Rise

Note: Trading data includes domestic private, domestic public and foreign bonds traded in local stock exchanges. Source: World Federation of Exchanges (WFE)

Asia (3) China Eastern Europe (3)

G7 (4) India LAC7 (4) Oth. Adv. Economies

(4)

Brazil0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

18%

178%

80%

39%

110%

21%

59%

10%

24%

35%

84%

39%31%

12%

57%

3%

30%23%

56% 58%

15% 12%

80%

1%

2000-2003 2004-2007 2008-2009

% T

otal

Bon

d M

ark

et C

apit

aliz

atio

n

Amount of New Issues

Private Bond Issuance is Small …

Source: SDC

Asia (5) G7 (7) LAC7 (7) Oth. Adv. Economies (7)

Brazil0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

1.2%

3.4%

0.8%

1.1%

0.8%

1.6%

4.7%

1.1%

1.7%

1.3%

1991-1999 2000-2008%

of G

DP

Total Amount of New Issues per Year as % of GDP

… Except in Chile

Source: SDC

1.1% 1.0%

3.1%

0.5%

1.2%

1.6%

0.0%

1.6%

3.5%

0.0%

0.9%

0.1%0.1%

1.5%

4.3%

0.6%

1.3%

0.7%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Argentina Brazil Chile Colombia Mexico Peru

% o

f GD

P

2000-2003 2004-2007 2008

Average Number of Firms Issuing Bonds

Private Bonds: Few (and Fewer) Firms Use Markets

Source: SDC

Asia (5) G7 (7) LAC7 (7) Oth. Adv. Economies (7)

Brazil0

50

100

150

200

250

300

350

400

450

500

9

369

30 20

69

21

462

19 2441

1990-1999 2000-2008

Nu

mb

er o

f Fir

ms

Concentration in Private Bond MarketsAmount Raised by Top 5 Issues

Private Bonds: Few Issues Capture Significant Share

Note: Concentration is defined as the top-5 issues as a percentage of the total amount raised by firms in domestic bond markets. Numbers in the base of the bars represent the average number of yearly issues. Source: SDC

Asia (5) G7 (7) LAC7 (6) Oth. Adv. Economies (6)

Brazil0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

60%

20%

54%59%

39%

55%

27%

43%

69%

41%

9 369 30 20 6921 462 19 24 41

1991-1999 2000-2008

% o

f Tot

al A

mou

nt

Rai

sed

Equity Markets

Equity Market Capitalization

Source: SDC

Market Capitalization as % of GDP

Asia (5) China Eastern Europe (2)

G7 (7) India LAC7 (7) Other Advanced Economies (7)

Brazil0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

77%

13% 13%

69%

32%28%

54%

22%

66% 66%

31%

89%

62%

42%

85%

51%

1990-1999 2000-2009

Trading Activity – Turnover Ratio

Equity Trading: A Different Picture than Mkt. Cap.

Note: Turnover ratio is defined as the total value traded per year in domestic markets over total market capitalization. Source: SDC

Asia (5) China Eastern Europe (7)

G7 (7) LAC7 (7) Oth. Adv.Economies

(7)

Brazil0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

73%

189%

47%

75%

25%

62%

50%

85%

124%

61%

128%

17%

102%

46%

1990-1999 2000-2009

Tu

rnov

er R

atio

Value Traded Abroad to Total Value Traded

Partly Explained by Trading Abroad

Source: Bank of New York and Bloomberg

Asia (1) China Eastern Europe (1)

G7 (5) India LAC7 (4) Oth. Adv. Economies

(5)

Brazil0%

10%

20%

30%

40%

50%

60%

70%

11% 12%8%

4%

12%

54%

19%

43%

13%12%

3% 3%

23%

58%

15%

55%

10%13%

5% 5%

27%

61%

16%

62%

2000-2003 2004-2007 2008-2009

% o

f Tot

al V

alue

Tra

ded

Partly Explained by Migration Abroad

Source: Bloomberg

Domestic and International Value Traded over Domestic Market CapitalizationFor Firms with DR Programs

00-05 06-10 00-05 06-10 00-05 06-10 00-05 06-10 00-05 06-10 00-05 06-10 00-05 06-10 00-05 06-10Asia China Eastern

EuropeG7 India LAC7 Oth. Adv.

EconomiesBrazil

0

0.5

1

1.5

2

2.5

1.0 1.1

1.4 1.5

1.10.9

1.1

1.6 1.5

2.1

0.4 0.4

0.8

1.2

0.50.8

0.00.0

0.00.1

0.0

0.0

0.0

0.00.0

0.1

0.20.3

0.1

0.1

0.3

0.4

Domestic Turnover International Turnover

Tu

rnov

er R

atio

Domestic Value Traded in Securities of Domestic and International Firms

Domestic Firms Gaining Space in Brazil

Source: Bloomberg and EMDB

22% 21% 20% 24% 26% 31% 32% 37%

78% 79% 80% 76% 74% 69% 68% 63%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005 2006 2007

Shar

e of

Tot

al D

omes

tic

Val

ue T

rade

d

Domestic Firms International Firms

Concentration in Domestic Equity MarketsShare of Value Traded by Top 5 Companies

Source: EMDB

… And Trading is Becoming Less Concentrated

Asia (5) China Eastern Europe (5)

India LAC7 (6) Brazil0%

10%

20%

30%

40%

50%

60%

70%

80%

36%

21%

63%

58%60%

74%

39%

20%

73%

39%

57%

40%

1990-1999 2000-2009

% o

f Tot

al V

alu

e T

rad

ed

Equity Markets – Issuance Activity

Breadth of Equity Markets: Issuance Activity Small (and Declining) in LAC

Source: SDC

Asia (5) China Eastern Europe (7)

G7 (7) India LAC7 (6) Oth. Adv. Economies

Brazil0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

1.6%

0.8%

0.2%

0.9%

0.3%

0.7%

1.0%

0.3%

1.4%

0.7%

0.3%

1.1%

0.7%

0.2%

1.4%

0.6%

1991-1999 2000-2008

% o

f GDP

Number of Listed Firms

Equity Markets: Few Firms List

Source: WDI

Asia (5) China Eastern Europe (7)

G7 (7) India LAC7 (7) Oth. Adv. Economies

(7)

Brazil0

1,000

2,000

3,000

4,000

5,000

6,000

425 441 225

2,072

4,441

224 385

545 715

1,382

167

2,322

5,207

175

828

403

1990-1999 2000-2009

Nu

mb

er o

f Lis

ted

Fir

ms

Average Number of Firms Raising Capital

Equity Markets: Even Fewer Firms Raise Capital

Source: SDC

Asia (5) China Eastern Europe (7)

G7 (7) India LAC7 (6) Oth. Adv.Economies

(7)

Brazil0

100

200

300

400

500

600

38

101

2

258

531

18

58

22

86 91

5

296

86

5

118

19

1991-1999 2000-2008N

um

ber

of L

iste

d F

irm

s

Note: Numbers in the base of the bars represent the average numbers of yearly issues. Source: SDC

Equity Markets: Also with Significant Concentration

Concentration in Domestic Equity MarketsShare of Amount Raised by Top 5 Issues

Asia (5) China Eastern Europe (7)

G7 (7) India LAC7 (6) Oth. Adv. Economies

(7)

Brazil0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

61%

29%

92%

50%45%

77%

68%

78%

62%

47%

85%

39%

54%

85%

63%67%

43 103 4 315 532 22 92 128 97 8 381 109 8 208

1991-1999 2000-2008 Series3 Series4

% o

f Tot

al A

mou

nt

Rai

sed

Institutional Investors

Pension Fund Assets

Pension Funds Gaining Ground

Source: AIOS

Asia (4) China Eastern Europe (7)

G7 (7) India LAC7 (7) Oth. Adv. Economies

(6)

Brazil0%

5%

10%

15%

20%

25%

30%

35%

40%

16%

0%2%

30%

5%

15%

26%

12%

15%

0%

5%

34%

6%

19%

33%

16%

2000-2004 2005-2009

% o

f GD

P

Mutual Fund Assets

Mutual Funds Growing Too

Source: ICI

Asia (4) China Eastern Europe (7)

G7 (7) India LAC7 (7) Oth. Adv. Economies

(6)

Brazil0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

12%

2% 2%

34%

4%

7%

19%

27%

17.1%

7.9%

4.3%

36.7%

7.4%

10.0%

23.7%

40.2%

2000-2004 2005-2009

% o

f GD

P

Composition of Pension Fund Investments in Latin America

1999-2004 2005-20080%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

51%45%

21%

16%

9%

8%

6%

12%

11%14%

2% 3%2%

Govt. Securities Fin. Inst. Sec/Deposits Private Bonds Foreign Securities Equities Mutual Funds

Other Investments

% o

f Tot

al P

ortfo

lio

… However, Portfolios are Concentrated in Deposits and Public Bonds

Source: OECD, ABRAPP, AIOSFP, FIAP, and local sources

Asia (2) Eastern Europe (4) G7 (5) LAC7 (5) Other Advanced Economies (6)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

24%

5% 3% 2%7%

37%

40%

16%

32% 26%

16%

10%

11%

19% 20%

1%

6%

1% 1%

5%

34%

20%

20% 16%

7%

10%

25%

22%19%

10%2%

18%

4%10%

Cash and Deposits Public Bonds Private Bonds Loans Equity Mutual Funds Others

% o

f Tot

al

… However, Portfolios are Concentrated in Deposits and Public Bonds

Source: OECD – Latest available information. Data for most countries are from 2009.

Portfolio Holdings of Pension Funds:

Mutual Funds - Portfolio HoldingsBrazil

2003-4 2005-90%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

6% 11%

73%

48%

5%

4%

2%

15%

11%17%

4% 5%

Deposit Certificates Government Bonds Private Bonds Fixed Inc. Sec. Backed by Gov. Debt Equity

Others

% o

f Tot

al A

sset

s

Mutual Fund Assets Also Concentrated in Bonds and MM Instruments

Source: IMF’s IFS, FGV-Rio, Conasev, Superfinanciera, Andimia, and Banxico

Mutual Funds - Portfolio HoldingsChile

2000-4 2005-90%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

63% 63%

17% 13%

4% 9%2%

8%14%

6%

Deposits Private Bonds Domestic Equity Foreign Equity Public Bonds

% o

f Tot

al A

sset

s

Mutual Fund Assets Also Concentrated in Bonds and MM Instruments

Source: IMF’s IFS, FGV-Rio, Conasev, Superfinanciera, Andimia, and Banxico

Mutual Funds - Portfolio HoldingsMexico

2003-4 2005-90%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

15% 14%

61% 63%

9% 9%

12% 10%

Deposits Dom. Public Bonds Dom. Private Bonds For. Private Bonds For. Public Bonds Equity Others

%of

Tot

al A

sset

s

Mutual Fund Assets Also Concentrated in Bonds and MM Instruments

Source: IMF’s IFS, FGV-Rio, Conasev, Superfinanciera, Andimia, and Banxico

Among Debt Securities: Pension and Mutual Funds Short Term vs. Insurance Cos.

Maturity Structure of Chilean Domestic Mutual Funds and PFAsvs. Insurance Companies

Avg. Maturity(1) Chilean Insurance Companies 10.32(2) Chilean Domestic Mutual Funds 3.88(3) Chilean PFAs 3.16

Shar

e of

por

tfolio

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 2 3 4 5 6 7 8 9 10

Chilean PFAs

Chilean Domestic Mutual Funds

Chilean Insurance Companies

Years to maturity

Note: This figure compares the maturity structure of Chilean insurance companies to that of Chilean domestic mutual funds and PFAs. Only medium- and long-term bond mutual funds are taken into account. Source: Opazo, Raddatz, Schmukler (2011).

113

Even When Investing Long Term Pays Off

Bond Sharpe Ratio at Different Maturities and Holding Periods

3m 12m 24m 36 m

Indices of Chilean Government Inflation-Indexed Bonds Indices Based on the Estimated Yield Curve

0

0.5

1

1.5

2

2.5

1 2 3 5 6 9 10 12 15 18 20

Sha

rpe

Rat

io

Years to maturity

3m 12m

24m 36m

0

0.5

1

1.5

2

2.5

1 2 3 5 6 9 10 12 15 18 20S

harp

e R

atio

Years to maturity

3m 12m

24m 36m

Note: This figure presents the Sharpe ratios (average returns/standard deviations) of Chilean bonds of different maturities for various holding periods (3 months, 1 year, 2 years, and 3 years). It shows statistics for indices of government inflation-indexed bonds, and using prices from model-based estimations of the yield curve. Source: Opazo, Raddatz, Schmukler (2011).

114

Conclusions

Substantially different & better, even when “insurmountable” Deeper systems, in domestic and international fronts More saving and more resources available in the economy Less crowding out by governments, but governments still large According to some measures, consumers appear to be better served Financial system more complex, somewhat more diversified

• Not that much bank-based• Bonds and equity play bigger role, corporate bonds emerging• Institutional investors much more prominent• Other types of financing taking off

Nature of financing is also changing• Longer maturities and less dollarization – less credit risk• More local financing, though foreign markets important for some• Fewer mismatches in domestic and external balance sheets

Concluding Remarks: Bottom Line

But several countries still lagging behind in many respects Growing divergence and cross-regional heterogeneity

No finance for all! Financial development through capital markets not spread to all firms

Constraints not on the supply side of funds (based on broad data) Constraints likely not on specific regulatory issues

These get much attention at country level, but this is a cross-country issue

Financial intermediation process more difficult than thought First expands to areas relatively easy to finance Incentives might play crucial role for more risk taking Might not yield socially optimal outcome Financial intermediaries brain of the economy, with MS

Concluding Remarks: Bottom Line

Going Long and Riskier

LAC’s current asset managers Charge substantial fees Yet spend mostly in marketing rather than asset management Large chunk of domestic savings intermediated by them Avoid risk taking, denying savers good long-term returns … … and corporations risk capital But at the same time shield them from volatility Herd to be close to the pack

The pitfalls to avoid (U.S.) Excessive risk taking Liquidity fallacy

Going Long and Riskier

Some of the policy challenges Step up the state’s oversight without undermining private monitoring

Promote market discipline through standardization and benchmarking without boosting short-termism

Take more long-term risk while being able to monitor managers

Be contrarian and use potential long-term arbitrage opportunities without generating backlash due to negative outcomes

Develop alternative ways of promoting participation (mandatory participation, shared infrastructure)

Generate healthy competition among financial intermediaries without perverse incentives

Take advantage of useful international diversification

Not clear how to proceed in many areas Institutional investors are emblematic Similarly with banks and capital markets

Nor what to expect of capital market financing Plus lack of obvious paradigm at international level

Collapse of role models: no roadmap after the crisis E.g. what to make of securitization and mortgage financing?

Eventually, need to catch up, grow, and take risk without undermining stability: strong trade-off Macro-prudential policies might not help Hard to distinguish spurious boom from leapfrog Especially for lagging areas and countries

Concluding Remarks: Bottom Line

Thank you!