IMF Survey of Supervision of State-owned Enterprises in the Financial Sector David Marston International Monetary Fund April 26, 2004

2 Survey Objectives Context Accept the landscape-manage the risks Ensure that IMF recommendations reflect “good practice” in supervision Initiate a research agenda aimed at developing “good practice” guidelines for the operation, oversight, and transparency of state owned financial enterprises.

3 Survey Coverage All ‘state owned’ financial institutions –commercial and specialized/ development banks and non-banks, insurance/guarantee cos., mutual, investment, provident and pension funds etc. ‘State owned’ –any shareholding arrangement by which the state (central, state or local or other elected body) or any entity of the state has a controlling ownership interest or a minority that allows the state to exercise management control

4 Survey Design Types of institutions and activities Ownership structures Policy goals Funding arrangements Supervision and oversight Governance arrangements

5 Caveats Work in progress – responses still coming Default sample Incomplete responses Factors inhibiting response –Apprehension of privatization agenda –Touchy subject –No single agency has this information –Lack of clarity

6 Survey Response 25 countries ( 10 developed, 3 transition and 13 developing) reported 683 SOFIs. 2 nil responses. Individual data provided for 101 institutions, aggregate data for the rest. SOFIs –are prevalent in many areas of financial activity, though commercial banking is dominant –are present in both the developed and developing countries –can have a significant size

7 State financial institutions are set up to meet policy goals Nationalization or takeover of private institutions is not common. In most cases, SOFIs set up with the intention of benefit of a particular region, particular trade or activity (SME, artisan, tradesmen) or agriculture, trade, encouragement of thrift, housing, collection of judicial deposits, (banks), infrastructure, general economic development, middle and low income housing, international trade, (development banks) health insurance, retirement schemes (funds).

8 Banks dominate the SOFI landscape

9 The state tends to have a majority ownership in SOFIs

10 State ownership in the financial sector can be significant

11 State Institutions Receive Funding from a Variety of Sources Retail and wholesale deposits Direct government grants Government deposits Long term borrowings Explicit liability guarantees Inclusion in the budget

12 State Institutions Typically Operate at a Loss Most institutions are ‘for profit’ A few operate on a ‘zero-cost’ basis. However, –1/3 rd reported a loss in 1 of 3 years –Capital injections into these institutions are not uncommon

13 Most “for Profit” & “Zero Cost” Institutions Operate at a Loss FOR PROFITZERO COST Losses in past three years 18 (25%) 6 (55%) Capital injections in previous periods 41 (58%)10 (90%) 24 guarantee companies run on zero cost basis which reported losses on an aggregated basis)

14 Does moral hazard of access to deep pockets cause higher NPLs ?

15 Issues in competition Legal requirement for continuing with govt ownership is rare Most institutions receive direct policy targets from government which are monitored regularly Lending to government is not very significant

16 Most institutions are supervised... Most institutions are subject to some form of third party supervision Loose convergence of supervisory approaches - development banks subject to supervision / regulation similar to commercial banks. However, compliance with regulations is monitored by the administrative ministry in some cases.

17 But supervision may not be effective. Further, supervisory standards could differ between state owned enterprises and their private sector counterparts. Corrective action is not available in the case of certain supervised institutions. Where available, supervisors may have to ‘consult’ with the government before taking corrective action.

18 Issues in governance Composition of the Board Appointment and term of chief executives Compensation of employees Audit policies and procedures

19 Regulatory paradigms Public – Private Commercial bank – Policy bank Deposit taker– non Deposit taker Financing institution – Refinancing institution Bank – Non bank

20 Thank you