21.
reducing the fiscal deficit, to reduce the risk of macroeconomic instability and toincrease the availability of finance to the private sector;2.
improving the legal, regulatory and supervisory frameworks, in order to improvebanks’ credit and risk management;3.
improving systems for dealing with weak banks;4.
developing capital markets further,5.
developing pensions and insurance to increase finance for long term investments,including infrastructure;6.
improving financial services to improve the welfare of customers and meet thechallenge of globalization of financial services; and7.
managing links to external capital markets;and possible approaches to meeting these challenges.
B. The importance of incentives and the legal, regulatory and supervisoryframework.
Building a sound incentive framework, that encourages individuals and institutions toprovide, gather and prudently use information to make sound decisions, with appropriaterewards for success and penalties for failure and malfeasance, is a key element infinancial reform
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Poor availability and use of information on users of funds is a majorfactor in bad credit and risk management, and responsible for many weak banks. Lack of information on borrowers reduces their incentives to service debt and leads to higheraverage borrowing costs, because lenders cannot distinguish between good and badborrowers. Information problems have played an important role in many systemicfinancial crises, along with macroeconomic instability, excesses of directed credit tofavored borrowers and unproductive projects, and poor regulation and supervision(Caprio).
Of course, improved availability and use of information will not eliminatelosses on loans, bonds and stocks. Some losses will always occur — investmentdecisions depend on outcomes in an uncertain, unknowable future and are inherently
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