Rethinking the Role of the State in Finance
Finance matters, both when it functions well and when it functions poorly. Supported by robust policies and systems, finance works quietly in the background, contributing to economic growth and poverty reduction. However, impaired by poor sector policies, unsound markets, and imprudent institutions, finance can lay the foundation for financial crises, destabilizing economies, hindering economic growth, and jeopardizing hard-won development gains among the most vulnerable.
The report benchmarks financial institutions and markets around the world, recognizing the diversity of modern financial systems. In its analysis of the state's role in finance, the report seeks to avoid simplistic, ideological views, instead aiming to develop a more nuanced approach to financial sector policy based on a synthesis of new data, research, and operational experiences.
The report emphasizes that the state has a crucial role in the financial sector - it needs to provide strong prudential supervision, ensure healthy competition, and enhance financial infrastructure. Regarding more direct interventions, such as state ownership of banks, the report presents new evidence that state involvement can help in mitigating adverse effects of a crisis. However, the report cautions that over longer periods, direct state involvement can have important negative effects on the financial sector and the economy.
Therefore, as crisis conditions recede, the evidence suggests that it is advisable for governments to shift from direct to indirect interventions.
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