PRESENTATION OF THE INTER-AMERICAN DEVELOPMENT BANK

FINANCIAL MARKETS DEVELOPMENT

On September 1999, the Board of the Executive Director of the Inter-American Development Bank has approved the Financial Market Strategy (FMS) to assist the Bank staff to define an orderly development of financial markets in Latin America and the Caribbean. The strategy is aimed at helping countries to achieve complete, harmonized and integrate financial markets and identifies two specific objectives:

Building upon existing reforms (and consolidating these as necessary); and developing the new instruments, institutions and markets needed to meet the savings, investments and risks management/risk transfer requirements of individuals and firms in the region

The Strategy proposes that primary emphasis continue to be placed on the banking system; due to its critical role in facilitating payments, providing liquidity and credit, and in the transmission of monetary policy, the banking system will continue to be the backbone of the financial sector. Nevertheless, increasing attention must also be placed on the development of capital markets and risk management system to support financing needs where bank loans and guarantees are not appropriate. The expansion of financial markets is aimed at facilitating investments that may not otherwise take place while reducing the cost of capital. Continued efforts will also be placed in supporting institutions and markets that meet the financial needs of those individuals and firms that have in the past been excluded from participation in formal financial markets, whether for reasons of size or geographic location. In both instances, market based reform efforts will be needed to assure that the proper incentives are in place and that programs are financially sustainable. Specific support is also aimed at continuing the rationalization of the role of the state in financial markets moving away from the direct provision of financial services to ensuring the existence of appropriate enabling environment.

Two conceptual tools will be at the disposal of the Bank to implement the Financial Market Strategy: the Country Specific Financial market strategy and the issue spec-111C, strategies.

The ‘Country specific Financial Market Strategy’should be based on the development needed over the next five to ten years. This should be supported by a specific country specific work plan (incorporated in the programming documents) to cover the next two to four years, incorporating an appropriate combination of the tools available to the IDB, including investment sector loans, multisectoral credits, technical assistance programs as well as educational and dissemination programs. As noted above, they need to be individualized to target the needs of each country.

Some of the IDB's efforts will have to be addressed on an "issue specific basis". Specific position papers or best practice papers will need to be developed to supplement the specific Country Specific Financial Markets Strategies. The Sustainable Development Department in consultation with the Regional Operating Departments, the Research Department, the Integration and Regional Programs Department, and the IDB Senior Management will develop the topics for the specific issues.

Below there is a brief summary of Bank Support for these specific issues. This review does not include the support provided to individual countries for strengthening financial market oversight under the banks normal lending and technical assistance program.

Survey of Compliance with BIS Core Principles for Bank Supervision

In 1998, the CHFI requested the Association of Bank Supervisors of the Americas (ASBA) to undertake a survey of compliance with the Core Principles of Bank Supervision prepared by the Bank for International Settlements (BIS). (This was to be done under the leadership of the Chilean Bank Supervisor who then held the revolving presidency of this association). The Bank was asked to help finance this undertaking. A Regional Technical Cooperation (TC-98-05-26-1-RG) for $100,000 was approved, along with $132,000 to be provided by the local counterpart. The ASBA expected to survey between 15 and 20 countries for this amount. It was expected that the Survey would be completed by the first quarter of 1999. Nevertheless, the survey has not yet been undertaken. In the first quarter of 1999, the BIS issued new guidelines for how such surveys should be undertaken and the Chilean Superintendent indicated that with $232,000 they would only be able to undertake the evaluation for 3 countries. Given the importance of these surveys, we have attempted to increase the level of finding. We have an indication of support for the European Union that they will provide an additional $100,000 (we are awaiting final confirmation). We have also requested ASBA to see if the individual supervisors can increase the local counterpart, and confirm the willingness to participate in the more extensive program. As soon as the, EU approval is granted, we hope to begin executing the program (we are targeting a minimum of 15 countries).

Bank and Securities Market Supervisor Training Program

The MIF approved a $1.3 million program to support regional (or sub-regional) training program for banks and securities market participants. The first programs for bank supervision were approved almost two years ago, but disbursement has been slow. Some programs have taken time to meet the requirement of the International Advisory Counsel that reviews the programs and approved programs have not begun. (The Executive Secretary of the ASBA complained to CHFI last year that disbursement have not been made, but they took more than 1 year to signed a contract due their reorganization (the contract for their program is finally expected to be signed this month). We have recently received several training programs for securities supervision and expect the first ones to be approved shortly. The attached chart provides a summary.

Western Hemisphere Initiative - Survey of Payments, Clearance and Settlement Practices

The Bank, at the request of the World Bank, participated in early stages of the Survey of Payments, Clearance and Settlement Systems (with a particular concentration on private sector involvement vis-a-vis securities markets). As well as involvement in overall design, the Bank participated in the first three pilot programs, Peru, Argentina and Chile. Nevertheless, as additional funds for this initiative have not become available, the decision was made to limit future participation to countries where there is an expressed demand and funding from the regional operating departments. While this Initiative was requested by the CHFI, the level of commitment from the respective countries has been somewhat limited. They have been willing to have the analysis undertaken, but in many cases did not take the lead in preparing the program. This resulted in a much higher cost (and likely a lower impact) to the IDB and World Bank than originally expected.

During the year 1999, it is worth noting the approval of the Financial Markets Strategy (FMS) of the Bank, which provides "the road map" of the activity of the Bank in this field. Integration and harmonization of financial markets are particularly stressed as well as cross-sector work (e.g., housing, municipal development, education). Country specific financial market strategies will be undertaken in the context of the country papers to implement the FMS. While not a CHFI Mandate, this strategy provides a base for several CHFI initiatives. In particular, the suggestion of developing country specific financial market strategies is closely related to the Financial Assessments being undertaken by the World Bank and the IMF (with possible IDB participation) that may be discussed at the CHFI meetings.

Financial and Securities Market Development Program

The program is near completion, the final disbursement is to be made by July 10, 2000. Approximately $35,000 in USD and $50,000 in BRD. Of the USD, committed payments include $15,000 for Burson-Marteller, $10,000 for evaluation of project and outstanding expenses from the Risk Management seminar and publication, and the publication on Financial Disclosure.

MICROENTERPRISE DIVISION (SUSTAINABLE DEVELOPMENT DEPARTMENT)

To assist the countries of the region that are interested in the development of microfinance and credit to small businesses, during 1998-1999 the IDB and the MIF invested over US$1.4 billion for new microfinance and small business credit programs; for providing technical assistance to strengthen financial intermediaries providing credit to the micro and small business sector; for reforms designed to improve the policy, legal and regulatory environment for microfinance; and for the dissemination and promotion of best practices in microfinance and small business credit. During this time period the IDB financed four nation-wide Global Loan Programs for Small and Microenteprise in Argentina, Bolivia, Brazil and Peru and 23 microfinance programs throughout the region under the Bank's Social Entrepreneurship Program. The MIF invested US$24 million in projects to expand microfinance services and credit to small businesses which include strengthening the operational and management capacity microfinance institutions; and a $12.9 million fast-disbursing loan and technical assistance program to aid financial institutions whose micro and small business loan portfolios were affected by the results of Hurricane Mitch in Central America. Additionally, the Bank financed a program for the development of guidelines for the regulation and supervision of microfinance in cooperation with the Association of Bank Superintendencies of the Americas (ASBA) and the Superintendencies of Colombia, Paraguay and Peru. On June 6, 2000 the Bank and MIF will jointly host a meeting of bank superintendents from Latin America to address the concerns with respect to regulations and supervision of microfinance, and will establish an advisory council for the creation of guidelines. Finally, the Bank has created the Inter-American Forum on Microenteprise Development, a regional meeting offers unique opportunities for the dissemination and promotion of best practices in microfinance and small business credit. Two forums have been held to date: in Mexico in 1998 and in Argentina in 1999.

Financial Crimes Area

A regional technical cooperation operation that is being executed through the OAS's "Comisi�n Interamericana para el Control del Abuso de Drogas" (CICAD) in eight member countries of the region, is intended to serve as a pilot project and to provide training to financial supervisors and to financial institutions in detecting money laundering activities/financial crimes. The training modules are currently being finalized and the activities are expected to take place this year. In addition, the Bank was welcomed as an observer institution by the Caribbean Financial Action Task Force (CFATF) and remains in close contact with both the CFATF and the Financial Action Task Force (FATF) for the exchange of information and cooperation in regional activities.

ANNEX

MULTILATERAL INVESTMENT FUND

BANK AND SECURITIES MARKET SUPERVISORS TRAINING PROGRAM

*Asociaci�n de Supervisores Bancarios de las Am�ricas

**Council of Securities Regulators of the Americas/US Securities and Exchange Commission

(1) Some of the ASBA programs may have taken place since the program was approved, but ASBA has not been able to sign the contract due to internal restructuring and organizational weaknesses.

(2) Program Funds were used to help prepare these two training programs ($25,000 for the Caribbean;$10,000 for Central America)

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