- Political stability
- Fiscal affairs
- Monetary policy
- Regulated markets
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Too big to fail or to be saved
submited on 09.10.2008 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
submited on 09.10.2008 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
When a year ago the first signs for liquidity issues of the American banks emerged, the dominating expectations were that the crisis will affect particular segments of the financial sector, but not the entire financial system. With the aim to improve liquidity the Federal Reserve decided to act aggressively, lowering the target rate from 5.25% to 1.5% in the moment. What is more, most investment banks were assisted with the argument that they are too big to fail.
The traditional belief is that potential bankruptcy of a larger market player represents risk for the entire financial system, which could afterwards damage the real sector. Meanwhile, the implicit state warrantee for the large financial corporations attracts investors and stimulates the hazardous behavior of their managers. Hence, big institutions gradually replace smaller market players, reducing competition and market efficiency.
The banking crisis in the 90’s is one of the cases, in which wrong monetary interventions led to collapse of the entire financial system. The introduction of the currency board heavily restricted the opportunities of the central bank to conduct monetary policy and therefore to stimulate risky behavior among market participants.
The positive effects from the introduction of the currency board are visible via the stable growth of the banking system in recent years. Bulgarian banks’ assets have grown almost seven times compared 2000, as the penetration arte of the banking sector (as % of GDP) reached 112%. Banks continue to be the most significant segment of the finance industry.
One of the reasons for the high growth in the banking sector is the intensification of competition among financial institutions. The market concentration, estimated via the Herfindahl index for example, gradually declines. The market share of the biggest financial institutions is shrinking, whereas the significance of the smaller market participants is increasing. Hence, the market mechanism allows to a big extent the “too big to fail” problem to be solved.
Intensification of competition among market players is visible in the non-banking sector as well. In all segments of the non-banking intermediation there has been a steady trend toward reducing market concentration.
While market concentration in the financial sector in Bulgaria is relatively low, many big companies continue to function in the real sector, regarded by default as too big to fail. Among them are the state monopolies – large part of which are economically inefficient, but continue to exist, receiving substantial government subsidies. Privatization and creating conditions for real competition are some of the possible solutions to the issues “too big to fail” in this case.
On the other hand, accumulating large budget surplus gave formal reason of given sectors (agriculture and tourism for example) to claim government help with the argument, that they are too important to the economy. Non-regular budget expenses with the aim to directly help particular sector could be dangerous, especially considering the fiscal prudence during a global crisis. What is more, the significant state presence is some sectors distorts market signals and leads to inefficient allocation of resources, which could pose new challenges before the economic growth in the long-term.
The traditional belief is that potential bankruptcy of a larger market player represents risk for the entire financial system, which could afterwards damage the real sector. Meanwhile, the implicit state warrantee for the large financial corporations attracts investors and stimulates the hazardous behavior of their managers. Hence, big institutions gradually replace smaller market players, reducing competition and market efficiency.
The banking crisis in the 90’s is one of the cases, in which wrong monetary interventions led to collapse of the entire financial system. The introduction of the currency board heavily restricted the opportunities of the central bank to conduct monetary policy and therefore to stimulate risky behavior among market participants.
The positive effects from the introduction of the currency board are visible via the stable growth of the banking system in recent years. Bulgarian banks’ assets have grown almost seven times compared 2000, as the penetration arte of the banking sector (as % of GDP) reached 112%. Banks continue to be the most significant segment of the finance industry.
One of the reasons for the high growth in the banking sector is the intensification of competition among financial institutions. The market concentration, estimated via the Herfindahl index for example, gradually declines. The market share of the biggest financial institutions is shrinking, whereas the significance of the smaller market participants is increasing. Hence, the market mechanism allows to a big extent the “too big to fail” problem to be solved.
Intensification of competition among market players is visible in the non-banking sector as well. In all segments of the non-banking intermediation there has been a steady trend toward reducing market concentration.
While market concentration in the financial sector in Bulgaria is relatively low, many big companies continue to function in the real sector, regarded by default as too big to fail. Among them are the state monopolies – large part of which are economically inefficient, but continue to exist, receiving substantial government subsidies. Privatization and creating conditions for real competition are some of the possible solutions to the issues “too big to fail” in this case.
On the other hand, accumulating large budget surplus gave formal reason of given sectors (agriculture and tourism for example) to claim government help with the argument, that they are too important to the economy. Non-regular budget expenses with the aim to directly help particular sector could be dangerous, especially considering the fiscal prudence during a global crisis. What is more, the significant state presence is some sectors distorts market signals and leads to inefficient allocation of resources, which could pose new challenges before the economic growth in the long-term.
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