Country-Level Assistance

Global Level Support

Thematic Perspectives

Building Strong Financial Systems, Addressing Vulnerabilities

A strong financial system is an essential building block for a sound investment climate, job creation, and sustainable growth. By improving poor people’s access to financial resources, a well-functioning financial system directly supports their climb out of poverty. It also spurs growth and reduces the likelihood and cost of financial crises; in this respect, its impact on poverty reduction is indirect—but significant.

Financial sector development and reform take time; growth does not occur overnight and recovery is not immediate. Some financial systems in East Asia remain fragile. Many emerging markets were newly set back after seeing some recovery in 2001, as slower growth in the United States and Japan reduced capital flows to them. New "fragilities" linked to fiscal and exchange rate issues and sustainability of reform have emerged: Turkey suffered a banking crisis and Argentina grappled with the threat of a liquidity crisis after three years of recession. As international financial systems integrate further, the international financial community has an even greater stake in working together to address vulnerabilities by promoting international standards and diverse financial systems.

Regional and Country-Level Assistance

The World Bank’s regional and country-level activities include a range of lending and nonlending services that respond to the specific needs of different financial systems (see boxes 3.8 and 3.9). Support to low-income countries has focused on strengthening banking systems and increasing access to financial services; in middle-income countries, the Bank has concentrated on deepening capital markets and improving the stability of financial systems.

Lending services. Lending for financial sector reform amounted to $2.2 billion in fiscal 2001, compared with $1.8 billion last year. Support to Turkey was aimed at helping to restructure and privatize state-owned banks and to empower the bank failure resolution entity. In Mexico the Bank continued assistance to strengthen financial system infrastructure. It also helped the Central Bank of West African States to put in place a set of regional payment mechanisms, and supported Brazil’s efforts to accelerate and consolidate financial sector reform—and thereby prevent financial crises, which hit the poor hardest. These loans are representative of the Bank’s efforts to help governments reduce the risks to consumers of using financial services; minimize the cost of resolving bad banks (thus enabling other government spending); and strengthen financial system infrastructures, without which growth could not take place.

Nonlending services. A core diagnostic process underlying activities in many countries is the joint World Bank–IMF Financial Sector Assessment Program. Joint missions of financial sector specialists help national authorities diagnose vulnerabilities and priorities in their financial sectors and assess observance of select international supervisory and regulatory standards and codes. The IMF’s focus on the linkages between the financial sector and macroeconomic performance is complemented by the Bank’s emphasis on economic development and capacity building. Twenty-three country assessments were undertaken in fiscal 2001, bringing the total to 35 assessments since program inception in May 1999. Follow-up to these assessments, in terms of technical assistance, has already taken place in more than a dozen countries. Another 24 to 30 countries are expected to participate in the program in fiscal 2002.

Technical assistance. Technical assistance has been an important tool for the Bank in helping governments carry out financial system reform. Advice continued to Indonesia to target pressure points for revitalizing economic growth: corporate governance of state banks, debt management, and corporate debt restructuring. In Ukraine, the Bank helped the government clearly define the methods and procedures for the resolution of one of the largest banks in the country, Banka Ukraina. Efforts to deepen and scale up microfinance services in Bangladesh will increase access to finance by up to 1.5 million new microcredit borrowers and will help skilled microcredit entrepreneurs move to higher levels of activities through loans of up to $1,000. By directly targeting women and the poorest segments of the population in rural and urban areas, this project will directly reduce poverty.

Support at the Global Level

At the global level, the Bank has worked to strengthen the international financial architecture by promoting international standards that respond to the requirements of developing countries, by developing tools to help governments maintain the stability of financial systems, and by offering training programs to build the capacity of supervisory and regulatory agencies. Besides the IMF, with whom coordination on financial sector work has increased significantly in the past few years, partners in these efforts include the Financial Stability Forum, Basel Committee on Banking Supervision, International Organization of Securities Commissions, and International Association of Insurance Supervisors. The Bank brings its unique perspective to global standard- setting bodies, based on its experience in the field and understanding of the difficulties in implementing financial standards in a developing-country context. For example, the lessons learned from implementing payment system standards in Latin America’s Western Hemisphere Clearance and Settlement Initiative were valuable in guiding the assessment and implementation of the Core Principles for Systemically Important Payments Systems.

The Bank has changed the way it generates and delivers knowledge on financial systems: it has worked more closely with partners, taken advantage of the Internet and distance learning, built online databases, and addressed information gaps that the Bank is uniquely able to fill. Specifically, the Bank is helping countries understand the new challenges and choices offered by electronic finance and the impact of technology on the integration of regional financial markets in developing countries. Together with the IMF, the Bank produced a handbook for developing government bond markets—essential for governments to reduce the exposure to external shocks. The Bank has tripled the resources accessible through the Financial Sector Web site, adding online databases that allow users to access banking laws and compare information about how banks are regulated and supervised around the world.

Central to the dissemination effort is a new model for delivering training and knowledge to member countries. Together with partners in the financial, academic, and official communities, the Bank has doubled its course offerings. Over 33 programs address policy issues in banking, capital markets, electronic finance, small financial systems, credit-reporting systems and credit scoring, housing finance, insurance supervision, disaster risk mitigation, payments systems, and microfinance.