Using standard theories of corporate governance, this paper highlights the special problems facing corporate governance of financial intermediaries and combines this theoretical perspective with international observations to make policy recommendations. Standard agency theory defines the corporate governance problem in terms how equity and debt holders influence managers to act in the best interests of the providers of capital. Financial intermediaries -- and banks in particular -- have special attributes that intensify standard corporate governance problems. Moreover, pervasive government involvement creates additional impediments to effective corporate control. Solutions to the governance problem in the financial intermediary sector demands special attention, and an approach that will best focus the role of governmental authorities. I.

The increasing integration of international financial markets poses new challenges to domestic financial markets everywhere, but especially in developing countries. The financial crises of 1994-95 and 1997-98 sounded wake-up calls to Latin America and East Asia, respectively, indicating that regulation and supervision needed to be strengthened substantially. Since then, important steps have been taken to set rules and ensure their implementation, but financial regulation and supervision do not take place in a vacuum. On the one hand, they must be consistent with domestic macroeconomic policies, and they need a supportive macroeconomic environment in which to operate. On the other hand, they have to take into account the new international rules being proposed by the Bank for International Settlements (BIS), the International Monetary Fund (IMF), and others. And, of course, all of this must be done in the context of scarce resources, especially trained personnel. This chapter looks at these issues from the viewpoint of Latin America, although many of the same problems and attempts at solutions can be found in other developing regions as well. 2 We begin with a brief look at the changing structure of the financial sector as a whole, with particular emphasis on changes among actors. Despite these changes, however, banks continue to dominate the sector and so we focus heavily on them in the analysis. In this context, we turn to

This paper assesses financial sector development in Latin America, both in the banking system and in the capital markets. After a brief review of the explanatory factors and the definitions of financial development found in the literature, Latin American countries are classified in groups of similar characteristics by using cluster analysis- first worldwide and second within the region- in terms of financial depth and per capita income. In the worldwide exercise, virtually all Latin American countries appear in the same cluster, which argues in favor of a regional dimension in financial development. A comparison of the Asian and Eastern European emerging regions shows that Latin America lags behind Asia in terms of financial development and compares slightly unfavorably with Eastern Europe. In the regional cluster exercise, four relatively homogeneous groups of Latin American countries are found. Stylized facts of the four groups ’ banking sectors and capital markets show- in line with the results of the more recent economic literature- that those countries which have deeper financial systems are also those with a more efficient financial system. Although no conclusions on causality can be drawn from this review, it argues in favor of a virtuous circle,

for their numerous and insightful remarks on earlier drafts of this Report. The authors thank professor Michael J. Artis for his excellent assistance with the English language version of the Report. The Report was submitted for publishing in March 2004. Design: Oliwka s.c. Printed by:

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The Global Corporate Governance Forum has commissioned a series of discussion papers that will help improve the understanding of corporate governance reform in developing countries. These papers discuss a number of issues raised by various regional corporate governance research network meetings organized by the Forum to support corporate governance research and policy discussion in developing countries. Comments on these papers are welcome and should be sent to the authors and copied to the Forum. The full series of discussion papers can be found on the Forums website.

The benefits of financial development and globalization have come with continuing fragility in financial sectors. Periodic crises have had real but heterogeneous welfare impacts and not just for poor people; indeed, some of the conditions that foster deep and persistent poverty, such as lack of connectivity to markets, have provided a degree of protection for the poor. Past crises have also had longerterm impacts for some of those affected, most notably through the nutrition and schooling of children in poor families. As in other areas of policy, effective responses to a crisis require sound data and must take account of incentives and behavior. An important lesson from past experience is that the short-term responses to a crisis— macroeconomic stabilization, trade policies, financial sector policies and social protection—cannot ignore longer-term implications for both economic development and vulnerability to future crises.

Abstract: In this paper, by employing the Generalized Method of Moment (GMM) techniques and Chinese provincial level data from 1991 to 2003, we empirically investigate the relationship between finance and growth in post-reform China. We find that financial development significantly promotes economic growth in coastal regions but not in inland regions; the weak finance-growth nexus in inland provinces has exacerbated China’s regional disparity. JEL Classification: D63; G20; R11

he banking sector in Latin America has undergone major changes in the recent past. Moving from highly controlled systems in which governments set interest rates, directed credit, and held a large share of bank deposits as required reserves, countries freed commercial banks to make their own decisions about borrowers, loan volume, and prices. At approximately the same time, capital account liberalization enabled local banks to engage in transactions in foreign currencies and allowed foreign institutions to enter local markets. Frequently such changes were made without having in place an adequate regulatory and supervisory system, which compounded problems for bankers without sufficient experience in credit analysis of local borrowers, much less the complexities of international financial markets. In addition, in some cases the abrupt integration of financial systems of widely different structure, size, and depth was in itself a source of instability. 2 The typical results of such multifaceted processes were credit booms, often rapidly expanding mismatches between maturities and currencies, followed by banking crises. Government rescues tended to follow, in a standard package: in the first instance, they involved takeover of nonperforming loans, recapitalization of banks, and liquidations and mergers, usually

The authors are grateful for the excellent assistance of Cindy Lee and for very helpful comments from Harry Makler.