FINANCIAL SERVICES LIBERALIZATION

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FINANCIAL SERVICES LIBERALIZATION
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Outline

• Introduction and Overview
• The Benefits of Financial Reform
• The Pitfalls of Reform
• Setting the context Toward the WTO Financial
  Services Agreement
• Case Study Thailand
• Conclusion Impacts of Foreign Entry on the
  Domestic Banking Market

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Introduction and Overview

• The World Trade Organization (WTO) financial
  services agreement (FSA),completed on 13 December
  1997,which will take effect early in 1999.
• The FSA is less than meets the eyes,and our
  evalution suggests that is a significant agenda
  of market opening measures still to be taken.
• Financial market development is a potentially
  factor in an economys long-term growth and
  development.

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Introduction and Overview

• Financial-market development is fundamental in
  two ways
• Changes the speed at which capital accumulates.
• Influences the efficiency of production in an
  economy.

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Introduction and Overview

• How dose the FSA contribute to financial-market
  and to a countrys long-term growth and
  development?
• OECD-country
• Developing-country

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Introduction and Overview

• The FSA promotes a countrys growth and welfare
  by providing a legal framework that reassures
  foreign institutions with long-term investments.
  It also provides external pressure for changes
  that promote sound financial institution, with
  domestic groups often resist to protect their own
  interests.

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Introduction and Overview

• 1. Internationalization ( or liberalization )
• Opening domestic market to cross-border trade,
  allowing entry by foreign firms, and opening the
  capital account.
• 2. Domestic financial reform
• Process of deregulation and strengthening
  domestic financial institution
• Financial Reform 12

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Introduction and Overview

• The focus of the WTO negotiations on freer
  cross-border trade and on foreign entry in
  financial services need to be understood in two
  contexts.
• First, within the WTO, it reflects the fact that
  many standard policy interventions in the
  financial sector are untouched by GATS
  commitments.
• Second, the FSA should be understood in terms of
  its contribution to financial-market development
  and growth.

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Introduction and Overview
The Benefits of Financial Reform

• The benefits of financial reform include faster
  growth.
• The benefits of better financial services are
  illustrated in
• cost saving
• quality improvements

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Introduction and Overview
The Benefits of Financial Reform

• Can be relized by the households, businesses and
  governments that are the main users of these
  services.
• Financial reform and internationalization in the
  industrialized countries have shown that
• Financial institution
• Savers and investors

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Introduction and Overview
The Benefits of Financial Reform

• User also benefit from increased competition and
  access to foreign expertise in several intangible
  ways, such as improved quaility of services and
  wider choice.

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Introduction and Overview
Objections to Deregulation and Market Opening

• Some countiries, however, are reluctant to
  deregulate fully, whereas others are reluctant to
  open. The reasons they cite are several.
• First, the experience of countris that have
  deregulated their financial-market, opened those
  markets for foreigners, and liberalized their
  capital accounts has been mixed.

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Introduction and Overview
Objections to Deregulation and Market Opening

• Second,these service, in this view, are best
  owned and controlled by domestic interests. More
  sophisticated foreign entrants, pursuingdifferent
  objectives, could come to dominate
• Third,reform and internationalization are often
  politically difficult be cause, although users
  stand to benefit, other powerful interests stand
  to lose.

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Introduction and Overview
Objections to Deregulation and Market Opening

• Agrument one by one
• First
• Reforming the domestic financial system and
  internationalizing it do ential risk.
• Striking a balance between financial-market
  efficiency and economic stability is difficult.
• Trade-off between economic stability and
  financial reform.

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Introduction and Overview
Objections to Deregulation and Market Opening

• Two major factors influence the chances of
  successful adjustment to these changes.
• Macroeconomic preconditions
• - stable and realistic price
• - prudent fiscal policy
• Reform of the financial sector
• - free up interest rates
• - reduce subsidization of credit
• - strengthen financial institutions and
  their super vision

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Introduction and Overview
Objections to Deregulation and Market Opening

• Second
• Foreign participation brings substantial
  benefits and can be managed.
• Third
• The answer is not to halt the process of reform
  and liberalization.Rather, it is to proceed while
  emphasizing the strengthening of the systems
  ability to evaluate risk

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The Benefits of Financial Reform

• Services that financial systems provide can be
  grouped into five categories
• mobilize an economys resources.
• facilitate the transactions necessary to carry on
  economic exchange and trade.
• improve risk management by pooling and
  diversifying the risks.
• collect and evaluate the information needed.
• monitor the behavior of corporate managers.

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The Benefits of Financial Reform

• Financial institutions are considered to
  specialize in
• Collecting funds from savers
• Evaluating potentially risky borrowers
• Allocating the funds they collect to those uses
  that promise the highest rates of return
• All these services are crucial to financing
  growth and promoting entrepreneurship.

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The Benefits of Financial Reform

• Idea This chapter surveys the benefits that can
  be expected from financial reform and the
  promises of a successful WTO financial services
  agreement in that respect.
• Increased competition will result in more
  efficient services and improvement in their
  quality and range.

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The Benefits of Financial Reform
Benefits to Users

• The benefits to users take two forms reduced
  costs of service to savers and borrowers with the
  introduction of more competition and improvements
  in from more efficient, customer-friendly
  financial institutions.

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The Benefits of Financial Reform
Benefits to Users

• Benefits to savers
• Receive higher rates of return
• Broader choice of savings instruments
• Easier access to financial products

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The Benefits of Financial Reform
Benefits to Users

• Benefits to borrowers
• More accurate appraisal of risk
• Reduced waiting times
• Expanded access to funds through more
  sophisticated lending instruments available in a
  wider range of maturities

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The Benefits of Financial Reform
Benefits to Users

• In exploring these two sources of benefits, we
  draw on available theoretical studies, empirical
  evidence, and anecdotes.
• The deregulation of US intrastate bank branching
  in the 1980s.
• The financial integration undertaken by the
  European Union.

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The Benefits of Financial Reform
Benefits to Users

• Among the many users of financial services, small
  and medium-sized enterprises are likely to gain
  the most from more efficient and competitive
  financial services.
• A study of 524 Indonesian manufacturing firms
  during 1981-88

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The Benefits of Financial Reform
Benefits to Users
Cost savings

• Easing restrictions on financial markets and
  expanding competition
• reduce corporate and household funding costs
• Lower costs in turn reduce product prices and
• Promote corporate competitiveness in
  international markets

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The Benefits of Financial Reform
Benefits to Users
Cost savings

• The survey by Berger, Hunter and Timme (1993)
• Technical inefficiencies account for 20 percent
  of banks cost.
• Banks lose as much as 50 percent of their
  potential profits to inefficiency.
• Two results emerge from surveying performance
  data

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The Benefits of Financial Reform
Benefits to Users
Improved Service and Quality

• Users also benefit from financial services reform
  and internationalization in number of qualitative
  ways.
• Increased competition brings a wider range of
  financial services, greater choice of
  institutions, new methods of services delivery,
  and price competition.

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The Benefits of Financial Reform
Benefits to Users
Improved Service and Quality

• Users obtain more accurate and comprehensible
  information
• Innovative instrument to hedge risks
• Banks have supplemented their traditional credit
  products with lower-risk
• Financial services mini-marts offering a range
  of products

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The Benefits of Financial Reform
Benefits to Users
Improved Service and Quality

• Internationalization accelerates the pace at
  which such benefits are realized, as foreign
  financial institutions bring innovations in
  products and in service delivery.

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The Benefits of Financial Reform
Benefits to Users
Improved Service and Quality

• As technological changes are introduced, users
  benefit from access to new distribution channels.
• In Taiwan, deregulation and internationalization
  have brought substantial change

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The Pitfalls of Reform

• Financial reform promises hefty benefits, but it
  also sets in motion a process of change that will
  impose some costs.
• There are legitimate concerns about giving
  competitive forces free play.
• But the analogy with trade in goods is useful
  here as well protection against foreign
  competition is not the best way to address these
  concerns.

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The Pitfalls of Reform

• This chapter surveys
• Three common arguments against financial reform
• That reform increases the chances of financial
  crisis
• That finance is a strategic sector and therefore
  must remain in domestic hands and closely
  regulated.
• That participants in the sector (and sometimes
  the government itself) will be hurt in bearing
  the burden of adjustment.

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The Pitfalls of Reform
Three Common Concerns

• How Dose Financial Reform Increase the risk of
  crisis?
• There is evidence that domestic deregulation and
  internationalization can expose or exacerbate
  problems in the presence of macroeconomic or
  regulatory weakness and may increase the risk
  that such weakness leads to a crisis.

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The Pitfalls of Reform

• The answer is to address those weaknesses, within
  banking and in macroeconomy.
• Foreign financial institutions and foreign entry
  are not, per se, associated with financial
  crises.
• There is a popular impression that banking crises
  are associated with financial reform.

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The Pitfalls of Reform

• One study of banking crises noted that, in 18 of
  25 cases, financial reform had occurred at some
  time in the previous 5 years.
• Other studies have identified a number of factors
  behind banking crises.
• Both studies agree on the association of credit
  expansion with domestic reforms.

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The Pitfalls of Reform

• This discussion naturally leads to the
  interaction between opening to foreign
  competition and opening the capital account of
  the balance of payments.
• In summary, a proper conceptual distinction among
  the issues at hand opening to foreign
  competition, opening the capital account,
  addressing domestic banking-sector weaknesses,
  and stabilizing the macroeconomy should help
  countries to realize that the challenge is not
  foreign competition per se.

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The Pitfalls of Reform

• Financial sector as strategic sector
• Another main reason why most countries delay
  their liberalization of financial service is that
  financial sector is believed to as a strategic
  sector in economic development.
• Financial sector is the medium through which most
  of economic transaction are conducted.

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The Pitfalls of Reform

• Banks also play important role in monetary
  transmission of monetary policy.
• Developing-country governments with immature
  financial system often dominated by banks have
  tended to organize their financial systems to
  channel financial resources to development
  priorities.
• Foreign financial institutions will have
  different priorities and will tend to ignore
  domestic objectives.

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The Pitfalls of Reform

• 3. Political Economy of Financial Reform
• The third reason for governments' reluctance to
  undertake reform relates to a set of political
  economy considerations about domestic costs of
  opening to foreign competition.
• The key issue is how much benefits of foreign
  entry are in hands of the Thais who have less
  bargaining power.
• The benefits are widely diffused and not well
  understood, making coalition building difficult.

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The Pitfalls of Reform

• Sequencing and Pacing Reform
• macroeconomic adjustment
• trade liberalization
• reform and restructure financial markets
• The reasons for such a sequence are as follows
• first, the capital inflow will cause a real
  currency appreciation
• second, capital inflows may help to sustain
  otherwise unsustainable budget deficits

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The Pitfalls of Reform

• third, allowing capital inflows before
  liberalizing trade may cause those inflows to be
  channeled to the wrong industries
• fourth, there is no reason to expect capital
  resources to be allocated to their most
  productive uses is the domestic financial system
  has not been liberalized.
• In reality, there are a variety of possible
  reform sequences to choose from, depending on the
  countrys macroeconomic, financial, legal,
  political, and sociological conditions.

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Setting the Context Toward the WTO Financial
Services Agreement

• This chapter focuses on the history of the
  financial services negotiations in the WTO.
• Beginning with the inclusion of services in the
  Uruguay Round.
• The next section presents the General Agreement
  on Trade in Services (GATS).
• The third section discuss the objectives of the
  financial services negotiations , basic stances
  and strategies of the negotiations.

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Setting the Context Toward the WTO Financial
Services Agreement

• Services in the Uruguay Round
• The introduction of services into the
  multilateral trade negotiations under the General
  Agreement on Tariffs and Trade (GATT) was one of
  the achievements of the Uruguay Round.
• The US trade delegation officially raised trade
  and investment in services issues at the GATT
  ministerial meeting and kept the pressure on
  thereafter.
• Eventually, the negotiating agenda was extended

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Setting the Context Toward the WTO Financial
Services Agreement

• Services in the Uruguay Round
• The insertion of services into multilateral trade
  agreement recognized the growing importance of
  trade in services in the growth of the world
  economy
• Most of the liberalization achieved for trade in
  goods should be extended to services
• Services were eventually included on the Uruguay
  Round agenda and led to GATS
• The final agreement of the Uruguay Round was
  completed in December 1993.

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Setting the Context Toward the WTO Financial
Services Agreement
Overview the GATS

• The three principles are embodied in the GATS
• Transparency
• Most favored nation (MFN)
• National Treatment

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Setting the Context Toward the WTO Financial
Services Agreement
Overview the GATS

• The GATS includes two main elements
• A core agreement with annexes and other documents
  
• A list of commitments. ( schedule of commitments)

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Setting the Context Toward the WTO Financial
Services Agreement

• Article I of GATS identifies four modes of
  delivery of internationally traded services
• Cross border Supply
• Consumption Aboard
• Commercial Presence
• Presence of nature person

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Setting the Context Toward the WTO Financial
Services Agreement
Objectives, stances, and Strategies

• Stances are divided by
• Developing- country stances
• Industrial country stances

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Setting the Context Toward the WTO Financial
Services Agreement

• Developing-Country Stances
• Developing countries have recognized that
  openness to the world economy is necessary for
  successful development, but there has been more
  hesitation about financial opening.
• They are urged to caution by the financial crises
  that have taken place in countries that have
  liberalized.

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Setting the Context Toward the WTO Financial
Services Agreement

• Developing-Country Stances
• Countries have to devise an indigenous phasing
  process that takes into account initial
  conditions in their financial sectors.
• Few of their financial firms have reached the
  size and efficient that could make them
  competitive in industrial countries financial
  markets.

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Setting the Context Toward the WTO Financial
Services Agreement

• Industrial country stances
• The situation is different in industrial
  countries, where financial firms have become
  large and powerful.
• Negotiations are undertaken sector by sector, a
  trade-off across sectors becomes impractical, and
  concessions to domestic sectoral interests in one
  area cannot be counterbalanced by those in
  another.
• Finally, the success of some developing countries
  in catching up economically to the established
  industrial economies.

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Case Study

• THAILAND

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Impacts of Foreign Entry on the Domestic Banking
Market

• Liberalization of financial services is a major
  trend recently due to necessities of financial
  services to support global activities such as
  international trade, investment and production.

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Impacts of Foreign Entry on the Domestic Banking
Market

• Positive Aspects
• Liberalization of financial services lead to
  several benefits as well as costs. Main benefits
  of foreign entry is higher competition in banking
  sector, leading to high quality, more variety of
  services at cheaper prices. This will benefit
  consumers of banking services.

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Impacts of Foreign Entry on the Domestic Banking
Market

• (i) improve the quality and availability of
  financial services in the domestic financial
  market
• (ii) serve to stimulate the development of the
  underlying banking supervisory and legal
  framework
• (iii) enhance a country's access to
  international capital.

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Impacts of Foreign Entry on the Domestic Banking
Market

• Negative Aspects
• Despite the potential benefits of financial
  service liberalization, there are three major
  concerns.
• Risk of crisis
• There is popular impression that banking crisis
  are associated with financial reform, and many
  government, especially in developing countries,
  considered an enhanced risk of crisis to be one
  to the costs.

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Impacts of Foreign Entry on the Domestic Banking
Market

• Financial sector as strategic sector
• Another main reason why most countries delay
  their liberalization of financial service is that
  financial sector is believed to as a strategic
  sector in economic development.
• Political Economy of Financial Reform
• The third reason for governments' reluctance to
  undertake reform relates to a set of political
  economy considerations about domestic costs of
  opening to foreign competition

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THE END