IDEAS home Printed from https://ideas.repec.org/a/oup/wbecrv/v27y2013i3p491-513.html
   My bibliography  Save this article

Notes on Financial System Development and Political Intervention-super-

Author

Listed:
  • Fenghua Song
  • Anjan Thakor

Abstract

We study the impact of political intervention on a financial system that consists of banks and financial markets and develops over time. In this financial system, banks and markets exhibit three forms of interaction: they compete, they complement each other, and they co-evolve. Co-evolution is generated by two new ingredients of financial system architecture relative to the existing theories: securitization and risk-sensitive bank capital. We show that securitization propagates banking advances to the financial market, permitting market evolution to be driven by bank evolution, and market advances are transmitted to banks through bank capital. We then examine how politicians determine the nature of political intervention designed to expand credit availability. We find that political intervention in banking exhibits a U-shaped pattern, where it is most notable in the early stage of financial system development (through bank capital subsidy in exchange for state ownership of banks) and in the advanced stage (through direct lending regulation). Despite expanding credit access, political intervention results in an increase in financial system risk and does not contribute to financial system evolution. Numerous policy implications are drawn out. Copyright 2013, Oxford University Press.

Suggested Citation

  • Fenghua Song & Anjan Thakor, 2013. "Notes on Financial System Development and Political Intervention-super-," The World Bank Economic Review, World Bank, vol. 27(3), pages 491-513.
    • Handle: RePEc:oup:wbecrv:v:27:y:2013:i:3:p:491-513
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/wber/lhs011
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Shabir, Mohsin & Jiang, Ping & Shahab, Yasir & Wang, Wenhao & Işık, Özcan & Mehroush, Iqra, 2024. "Diversification and bank stability: Role of political instability and climate risk," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 63-92.
    2. Ahamed, M. Mostak & Mallick, Sushanta, 2017. "Does regulatory forbearance matter for bank stability? Evidence from creditors’ perspective," Journal of Financial Stability, Elsevier, vol. 28(C), pages 163-180.
    3. Guangdong Xu, 2022. "From financial structure to economic growth: Theory, evidence and challenges," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 51(1), February.
    4. Xu Guangdong, 2021. "Reassessing the Literature on the Relationship Between Financial Structure and Economic Growth," Review of Economics, De Gruyter, vol. 72(2), pages 149-182, August.
    5. Molina Danielken & Roa Mónica, 2017. "The Effect of Bank Credit and the Trade Patterns of Colombian Exporters," Working Papers 2017-19, Banco de México.
    6. Mostak Ahamed, M. & Mallick, Sushanta K., 2017. "House of restructured assets: How do they affect bank risk in an emerging market?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 47(C), pages 1-14.
    7. Vinogradov, Dmitri & Makhlouf, Yousef, 2021. "Two faces of financial systems: Provision of services versus shock-smoothing," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    8. Claessens, Stijn, 2017. "Regulation and structural change in financial systems," CEPR Discussion Papers 11822, C.E.P.R. Discussion Papers.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:wbecrv:v:27:y:2013:i:3:p:491-513. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://edirc.repec.org/data/wrldbus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.