Retail Borrowing Programs 16 th OECD Global Debt Forum Amsterdam December 6, 2006 Phillip Anderson Banking and Debt Management World Bank
Retail Borrowing Instruments Two types: regular wholesale securities made available to small investors, often on a non-competitive basis in auctions Securities specifically designed for retail investors Easy to understand Provide capital protection Non-marketable; but offer provisions for redemption before maturity Exotic instruments in some countries lottery bonds
Objectives for offering retail programs Meet government s financing needs in a cost effective manner, subject to prudent levels of risk (same as wholesale borrowing) Diversify investor base, particularly when borrowing need is high Develop domestic debt markets: foster innovation, encourage competition Social objectives: educate and promote a culture of savings, provide a totally secure investment (particularly for more vulnerable citizens)
But some countries are questioning these programs now Shrinking public debt levels may reduce the need In some countries (e.g. Canada, small euro-zone countries) priority is to maintain a liquid wholesale market Cost-effectiveness has come under scrutiny higher distribution and administration costs Objective of fostering financial development becomes obsolete markets more competitive and liberal
Other countries see a continued need For example Ireland, Japan, Sweden and the UK: Social objectives remain especially providing direct access to a safe instrument for pensioners and low income households Specific retail instruments can be priced to take account of the higher administration costs compared to wholesale borrowing Moves to drive costs down with electronic distribution, economies of scale
If you are thinking about a retail program 1. Be clear about the objectives(s) 2. Assess the true economic costs of the program, e.g. initial start-up investments, distribution, administration. These considerations are critical for the design, e.g. If you wish to diversify funding to reduce borrowing costs: direct access to the primary market perhaps via internet If you wish to reach the non-banked population: use of post office or state-owned institutions networks
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