Jonathan L. Fiechter Monetary and Financial Systems Department, International Monetary Fund

1. Supervision of State-Owned Financial InstitutionsRole of State-Owned Financial Institutions Bank/Fund/Brookings Seminar April 26-27, 2004, Washington, DC Jonathan L. Fiechter Monetary and Financial Systems Department, International Monetary Fund

2. Outline of Presentation • Why Formally Supervise SOFIs? • A Framework for Supervision • Next Steps

3. Effective Supervision of SOFIs is an Important Goal • Assumptions: • State-owned financial institutions (SOFIs) are permanent part of government • Many SOFIs do not fall under the jurisdiction of bank supervisors • Concern: • While soundly-run SOFIs may generate positive results for a country.... • Poorly-run SOFIs generate large fiscal losses and fail to achieve their intended objectives

4. Two Types of State-Owned Financial Institutions • State-owned commercial banks • Deposit taking • Engaged in commercial bank-like operations • Non-bank state-owned financial institutions • Typically non-deposit taking • Facilitate credit flows to specific sectors via: • Loans • Guarantees & insurance • Interest rate subsidies

5. SOFIs and Commercial BanksPose Similar Risks for Governments BanksSOFIs Payments system X-- Reputation X X Fiscal XX

6. Supervisory Guidelines for Non-Bank SOFIs Do Not Exist • Bank supervisors rely on the Basel Committee’s “Core Principles for Effective Banking Supervision” • Supervisory practices for SOFIs vary widely • Often ad hoc with no formal authority or structure • “Supervisors” lack independence • Supervisory focus often an audit function rather than “safety and soundness” • Sound supervisory framework is a plus

7. Effective Supervision of SOFIs • Sound legal & political infrastructure • Clear mandate and budget for SOFIs • Independent supervisor with authority re: • New programs • On-site and off-site examinations • Minimum capital • Credit policy & internal controls • Risk management • Books and records • Management approval/removal

8. # 2: SOFIs Need a Well-Defined Mandate and Budget • SOFIs are vulnerable to “mission creep” • Lack constraints imposed by market discipline • Often unlimited demand from constituents for credit services • Encourages rapid expansion; lowering of credit standards • May expand into areas beyond level of expertise • Avoid unintended weakening of private banking market

9. #3: Supervisor Needs a Clear Mandate and Adequate Authority • SOFI supervisor needs operational independence • Adequate budget and qualified staff • Legal authority to obtain information and require periodic reports • Authority to investigate and maintain confidentiality of sensitive information

10. #4: New Activities Should Require Pre-approval by Supervisor • Scope of operations should be defined in authorizing legislation • New activities and substantive changes in existing credit programs should be reviewed and approved in advance by supervisor

11. #5: Minimum Capital Requirements • Acts as a “governor” to avoid rapid expansion • Measure of the “cost” of providing the credit services • Provides basis for private sector comparison • Cushions unexpected demands on fiscal resources

12. #6: Adequacy of Credit Policies and Internal Controls • State financial institutions should have written policies and procedures governing credit extensions including: • Eligibility requirements for recipients of credit • Credit approval procedures and responsibilities • Internal loan review process • Periodic internal audits testing implementation

13. Next steps... • Expand number of participants in IMF survey of supervisory practices of SOFIs • Prepare case studies of SOFI supervisory arrangements -- what has worked and what have been the problems? • Explore demand/usefulness of a more formal set of guidelines