Financial markets

Financial Market Trends No.89, November 2005


Please find below an overview of each of the articles published in the November 2005 issue of Financial Market Trends:

Highlights of Recent Trends in Financial Markets

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Governance of Banks in China

With the economic reform in the late 1970s, it has been an objective of government policy for Chinese banks to move way from their traditional passive role of executing directives adapted to the active role in resource allocation of banks in a market economy. However, owing to unclear ownership structures and a history of support of regional and industrial policy, most Chinese banks have had difficulty making the transition. This is particularly true for the four large state-owned commercial banks (SOCBs) which account for the predominant share of bank assets, which have historically functioned as extensions of the government. In contrast, the second largest category of banks, the 11 Joint Stock Banks (JSBs), have stronger earnings and better balance sheets. In 1998-99, a significant effort to strengthen SOCB balance sheets was undertaken with the subsidised sale of a large portion of non-performing loans (NPLs) to government-owned asset management companies, but the results were disappointing. In the most recent phase of the reform, which began in 2003, the authorities concluded that further attempts at rehabilitation of the SOCBs had to address the issue of bank governance.

The key elements of the most recent phase of the reform, which began in 2003, are ownership diversification, public listing and expanded foreign presence, designed to subject all banks to higher standards of transparency and disclosure, with more intense scrutiny by banking counterparties, investment analysts, institutional investors and rating agencies. At the same time, measures to improve bank supervision were accelerated with the formation of a specialized independent agency for bank supervision (the China Banking Regulatory Commission or CBRC) and the enactment of a series of laws and regulations pertaining to bank supervision.

Improving Financial Literacy: Principles, Programmes, Good Practices

In 2003, the OECD established the Financial Education Project in response to the increasing interest of its member countries in improving the financial literacy of their consumers. Phase one of this project has culminated in the publication of the first major study of financial education at the international level: Improving Financial Literacy: Principle, Programmes, Good Practices (OECD, 2005, forthcoming). This article reproduces the executive summary of the book, which briefly discusses the factors increasing the importance of financial education, the benefits of financial education to consumers and the economy, the different ways in which financial education is provided, and the major findings of the report.

The Aggregate and Structural Impact of Ageing on Financial Markets: Some Quantitative Assessments

Ageing will translate into long run trends in supply as well as demand of capital in the next decades. This paper provides some quantitative assessments of the effects on financial markets of ageing in four large OECD countries (United States, Japan, Germany, and France). Using a simplified general equilibrium model with overlapping generations, it suggests that ageing could bolster capital-labour ratios and lower interest rates in the future (by 25 bp to 100 bp in the long run, depending on the characteristics of pension systems reforms). In this context, the fear for a future “asset meltdown” due to ageing is probably overstated. The model also suggests that the individual accumulation of capital is likely to increase in the future and require structural changes in financial markets.  Households will increasingly need to insure against the uncertainty related to future asset prices, rates of return on capital or individual longevity. This paper assesses the welfare gains an individual can benefit from purchasing an annuity at retirement. It suggests that buying annuities, even if actuarially unfair, may increase significantly households’ welfare. These results call for policies supporting the development of annuities markets failures and reverse mortgages.

Pension Funds for Government Workers in OECD Countries

In the past few years, there has been a trend towards the harmonisation of pension policies for private and public sector workers, with the introduction of occupational complementary pension funds for civil servants. In many OECD countries these funds are among the largest in terms of assets and number of participants and constitute an important share of financial assets. Nonetheless, civil servants’ pension funds are exposed to particular risks related to the multiple roles played by the state which is, at same time, sponsor, regulator, supervisor, service provider, fiduciary agent and recipient of pension fund investments. Specific government-related agency problems can arise with respect to these funds which differ from those frequently analysed in the private sector. This paper analyses these risks in light of the experiences of Australia, Canada, Japan, the Netherlands and the United States and identifies good practices on how to avoid or mitigate them.

Recommendation on Guidelines for Insurers Governance

Recent scandals have revealed huge financial irregularities and highlighted the need for the insurance industry and its watchdogs to improve governance standards in order to strengthen investors’ and customers confidence in the insurance industry. The 12-point Guidelines for Insurers’ Governance provide governments and the insurance and reinsurance industry including mutual entities with a roadmap to do this and thereby better protect policyholders and shareholders..


Ageing and pension system reform: implications for financial markets and economic policies

The demographic transition to older societies, in the most advanced economies but also beyond, is ushering in economic and financial changes. These were reviewed by the G10 in a 1998 report, The Macroeconomic and Financial Implications of Ageing Populations, which analysed the impact of population ageing on growth and living standards, public finances, financial markets and international capital flows. In line with some of the main recommendations of that report, pension system reforms have been undertaken since then in most G10 countries, and experience with private saving for retirement has continued to build up, with substantial and instructive differences across countries. Published as a supplement to Financial Market Trends, No. 80, this report examines the financial market and policy implications of the increasing importance of funded retirement saving.