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Bangladesh must improve banking system: WB

The lender stresses the role of the state in finance

Star Business Desk
Bangladesh has upgraded the prudential regulatory and supervisory framework for banks, but further improvement would be needed to bring the system up to international standards, the World Bank said in its report on Thursday.
"Loan classification, provisioning, rescheduling, and even capital in banks appears uneven and needs strengthening to be brought to international standards,” the global lender said in its report, "Global financial development report: Rethinking the role of the state in finance”.
Overall message of the report of two main parts is cautionary. The first part introduces measures of different characteristics of financial systems that are useful in benchmarking financial systems around the world.
The second part examines various aspects of the state's role in finance, according to World Bank that released the report in Washington DC at the bank's headquarters.
Coinciding with the anniversary of the 2008 collapse of Lehman Brothers, the report drew on several new global surveys and com-
piles unique country-level data covering more than 200 economies since the 1960s.
Analyzing four characteristics --the size of financial institutions and markets, financial access, efficiency, and stability — the report tracked financial systems in the run up to the global financial crisis and gauge the extent of their recovery to date.
Governments need to provide strong supervision and ensure healthy competition in the financial sector, World Bank Group Managing Director Mahmoud Mohieldin said in a statement, launching the report.
They also need to support financial infrastructure, such as better quality credit information that is shared more systematically, he said.
The report also reviewed recent successes and failures of the state as a regulator and supervisor.
The global financial crisis has given greater credence to the idea that active state involvement in the financial sector can help maintain economic stability, drive growth, and create jobs, said the global lender.
There is evidence that some interventions may have had an impact, at least in the short run,
it said.
But there is also evidence on potential longer term negative effects, the lender said, adding that the evidence also suggests that, as the crisis subsides, there may be a need to adjust the role of the state from direct interventions to less direct involvement.
"This does not mean that the state should withdraw from overseeing finance. To the contrary, the state has a very important role, especially in providing supervision, ensuring healthy competition, and strengthening financial infrastructure."
The lender put emphasis on incentives for the financial sector. The main challenge of financial sector policies is to better align private incentives with public interest without taxing or subsidising private risk-taking, it said.
Design of public policy needs to strike the right balance, promoting development, yet in a sustainable way. "This approach leads to challenges and trade-offs."
In regulation and supervision, one of the crisis lessons is the importance of getting the “basics" right first. That means solid and transparent institutional frameworks to promote financial stability.