Regulation of Financial Intermediaries in Emerging Markets

Article excerpt

Regulation of Financial Intermediaries in Emerging Markets

Edited by T T Ram Mohan, Rupa Rege Nitsure and Mathew Joseph Response Books, A division of Sage Publications India Pvt. Ltd, New Delhi, 2005.

The financial sector has undergone a rapid transformation during the last ten years. Unlike what it was during 1951 to 1991, today's financial sector is grappling with the twin issues of globalization and democratization. The Indian financial sector is in the process of formulating a vision for 2020. In any such exercise, it has to take on questions such as: Where does it stand now? Where it would like to be and why? How it could get there? It should also take a clear stand on views such as: Finance promotes growth; finance follows growth; finance does not matter; finance hurts growth; and; finance matters for crises.

This volume is a collection of papers discussed at the ICICl Research Center-IIMA International Conference on 'Regulation of Financial Intermediaries in Emerging Markets' held in March 2002. Besides an introductory note from Rupa Rege Nitsure, Mathew Joseph and T T Ram Mohan, the volume comprises eight chapters covering themes such as critical issues in banking sector, cross country analysis of external governance and bank profitability, regulation of banks, regulation of financial conglomerates, and nonperforming assets.

The introductory note summarizes the discussions on the theme of the conference and presents a bird's-eye view of the papers presented. T T Ram Mohan identifies some critical issues such as recapitalization of domestic banks, corporate governance in the financial sector, bank privatization, nonperforming assets situation in banks have been focused in the note.

James R Barth and Susanne Trimbarth observe that there is a significant positive correlation between the size of a country's financial system and its real GDP per capita. They identify 'best practices' areas as bank powers; entry policies; capita; adequacy; supervisory power and autonomy; deposit insurance; loan classification, provisioning, asset allocation, internal management; etc., and state ownership. They indicate some open issues on which there are big cross-country differences as regards bond and derivatives market, off-balance sheet activities of banks, role of venture capital, comparative advantage and absolute advantage in financial services, and e-finance and globalization.

James R Barth, Valentina Hartarska, Daniel E Nolle and Triphon Phuminwasana observe that healthy banking systems require more insightful regulation and supervision. In their view efficient functioning of financial systems requires both the corporate governance and the external governance. They, however, say that very little attention has been paid to the corporate governance of banks. Quoting Caprio and Levine, they identify four sources of governance for banks: Shareholders, debt-holders, the competitive discipline of output markets and governments. They recognize accountability standards, strength of external audits, financial statement transparency, and external rating and credit monitoring as the subcomponent of . the external governance. The empirical results of their study indicate that external governance does indeed matter for bank profitability and the magnitude of the effects of external governance measures is also economically significant.

Uwe Neumann and Philip Turner address questions about the desirability of a market-orientated, risk sensitive framework for banks in emerging market economies. …