Supervision of Public Banks Challenges and problems faced in Colombia since the mid 1990’s Patricia Correa Data source: Superintendencia Bancaria de Colombia

Outline Stylized Facts Political economy aspects : the problem of incentives What to do

Outline Stylized Facts Political economy aspects : the problem of incentives What to do

: Financial Crisis Fiscal cost: aprox. US $6 billion; Of which 67% was destined to Public Banks resolution

Current Public Banks TodayBefore 1998Policy / Strategy so far Bancafé (13.3%)* Banco Cafetero + Concasa Cleaning up, capitalization and attempt to privatizing Banagrario (21%)* Caja AgrariaCleaning up and capitalization Granahorrar (12.1%)* Old Granahorrar (private) + Banco Central Hipotecario (public) Incomplete cleaning up, capitalization, privatization? closening)? Banestado (87.8%)* Banco del EstadoAttempt to close it * Capital Adequacy Ratio; average total financial system: 12.9% (Feb.2003 )

Outline Stylized Facts Political economy aspects : the problem of incentives What to do

The problem of incentives Principal stakeholders or players:  The owner/s (government) of public banks  The administrators of public banks  The supervisor  The public

The problem of incentives Very rarely do objectives of different players easily converge Owner/s (government) of public banks Administrators of public banks Supervisor Public FINANCIAL STABILITY

Government Incentives 1.Develop strategic regions or economic sectors 2. Fiscal Goals and inventives 3. Other Political 4. Financial Stability The problem of incentives

1. “Economic Development” goals for public banks in Colombia To fill in gaps created by “market imperfections” (credit loans and insurance to activities perceived as highly risky) 1)Improve access to financial services in rural areas and low income population 2)Insurance of land transportation 3)Motorcycles accidents Implementation of economic development strategies based on “leading” sectors 1)Small and medium enterprises 2)Labour intensive construction sectors- low income housing 3)Coffee and other agricultural activities The problem of incentives

2. Fiscal objectives Generate profits to finance deficits in central government finances or other public sectors (case of Banagrario) The problem of incentives

3. Other “political” goals Sustain or consolidate power through financial support of specific interests or groups (through cheap lending and insurance, high yields to investment, etc.). Campaign financing. Direct employment- Clientelism The problem of incentives

Incentives of the administrators 1.Same as Government’s 2.Personal political objectives (different from government when belonging to another political party or when time horizon is different) 3.Personal economic benefits- corruption 4.Financial stability and social welfare The problem of incentives

Objectives of the Supervisor Typical mission statement: Guarantee financial stability and the protection of the rights of depositants (and other clients of the financial system) The problem of incentives

Objectives of the Supervisor However, under certain institutional arrangements: Government goals become also goals of the supervisor Other Macroeconomic goals of central banks (different from prudential goals, such as monetary or exchange rate objectives) become also goals of the supervisor The problem of incentives

Outline Stylized Facts Political economy aspects : the problem of incentives What to do

1.Close public banks 2. If not feasable, some instituttional reforms are necessary: More political independence for supervisor, with greater accountability Regulation and supervision that focuses on strengthening: –Corporate governance (responsibility of board members) –Internal risk management (especially credit risk) –Transparency

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