Risk absorption by the state: when is it good public policy?

The global financial crisis brought public guarantees to the forefront of the policy debate. Based on a review of the theoretical foundations of public guarantees, this paper concludes that the commonly used justifications for public guarantees based solely on agency frictions (such as adverse selection or lack of collateral) and/or un-internalized externalities are flawed. When risk is idiosyncratic, it is highly unlikely that a case for guarantees can be made without risk aversion. When risk aversion is explicitly added to the picture, public guarantees may be justified by the state's natural advantage in dealing with collective action failures (providing public goods).

The state can spread risk more finely across space and time because it can coordinate and pool atomistic agents that would otherwise not organize themselves to solve monitoring or commitment problems. Public guarantees may be transitory, until financial systems mature, or permanent, when risk is fat-tailed. In the case of aggregate (non-diversifiable) risk, permanent public guarantees may also be justified, but in this case the state adds value not by spreading risk but by coordinating agents.

In addition to greater transparency in justifying public guarantees, the analysis calls for exploiting the natural complementarities between the state and the markets in bearing risk.

World Bank.Author: Anginer, Deniz ; de la Torre, Augusto ; Ize, Alain.Document Date:  2011/12/01.Document Type:  Policy Research Working Paper
Report Number: WPS5893.Volume No:  1 of 1

Risk absorption by the state: when is it good public policy?

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IFC Risk Certification Program Helps Boost Financial Sustainability in Central Asia

worldbank.Tashkent, Uzbekistan, November 25, 2011—IFC, a member of the World Bank Group, is providing financial risk-management training to institutions in Azerbaijan, the Kyrgyz Republic, Tajikistan, and Uzbekistan, helping them reduce their risk of losses.

As part of the first round of the Risk Certification Program implementation, IFC conducted review classes on the fundamentals of financial risk on November 17-24 in Tashkent. The review classes focus on risk-management methodologies, governance structures for the management of risk in financial institutions, and an overview of globally accepted standards and concepts in these areas.

The program is organized in partnership with the Global Association of Risk Professionals, a globally recognized leader in financial-risk testing and certification programs, and educational and training activities.

Representatives of the Central Bank of the Republic of Uzbekistan and local training partners (Regional Baking Training Center and Federation of Accountants, Auditors and Consultants of Uzbekistan) joined the classes and passed GARP’s certification exam in Tashkent. Local training partners will further train staff of local banks and financial institutions during the second phase of the program. The review classes were held in Azerbaijan in September and in the Kyrgyz Republic and Tajikistan in October.

“Risk management is important aspect of stability of the banking system”, said Jahongir Abdurasulov, Deputy Director of Department of licensing and coordination of credit organizations’ activity at the Central Bank of the Republic of Uzbekistan. ”The banks are looking for good risk-management practices and are trying to test various methods. IFC’s Risk Certification Program, the first in the region, provides a unique opportunity to improve my knowledge of risk management from an international perspective.”

This training initiative is part of the IFC Azerbaijan-Central Asia Financial Markets Infrastructure Advisory Services Project, and the IFC Financial Markets Crisis Management Project, which are funded by Austria, Finland, the Netherlands, and Switzerland.

“IFC’s Risk Certification Program provides local banks and microfinance institutions access to globally acknowledged financial risk-management concepts and standards,” said Rolf Behrndt, IFC Regional Business Line Manager. “We hope as many bank and microfinance organization employees as possible will take these opportunities to expand their knowledge of financial risk management and earn certificates from the Global Association of Risk Professionals.”

IFC aims to strengthen financial markets in the region by strengthening credit information systems and risk-management practices and education, as well as by facilitating the resolution of distressed loans.

Available in: Uzbek, русский

About IFCIFC, a member of the World Bank Group, is the largest global development institution focused exclusively on the private sector. We help developing countries achieve sustainable growth by financing investment, providing advisory services to businesses and governments, and mobilizing capital in the international financial markets. In fiscal 2011, amid economic uncertainty across the globe, we helped our clients create jobs, strengthen environmental performance, and contribute to their local communities—all while driving our investments to an all-time high of nearly $19 billion. For more information, visit www.ifc.org

About GARPThe Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions. Membership represents nearly 150,000 risk management practitioners and researchers from banks, investment management firms, government agencies, academic institutions, and corporations from more than 195 countries. GARP administers the Financial Risk Manager (FRM®) and the Energy Risk Professional (ERP®) exams; certifications recognized by risk professionals worldwide. GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels. www.garp.org.

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