WORLD TRADE  
ORGANIZATION  RESTRICTED 
S/FIN/M/68 
15 June 2011  
 
(11-2921) 
Committee on Trade in Financial Services  
  
 
REPORT OF THE MEETING HELD ON 12 MAY 2011 
 
Note by the Secretariat
1 
 
1. The Committee on Trade in Financial Services he ld a meeting on 12 May 2011.  The agenda 
for this meeting is contained in Airgram WTO/AIR/3748.   
A. APPOINTMENT OF THE NEW CHAIRPERSON FOR THE COMMITTEE  
2. The outgoing Chairperson, Mrs Helen Stylianou (Australia), recalled that, according to the 
rules of procedure for meetings of the Council fo r Trade in Services (S/L/15), the handover should 
have taken place at the end of the previous meeti ng of the Committee.  However, since the Chairman 
of the Council for Trade in Services had not finalised his consultations on the chairmanships of the 
subsidiary bodies at that time, it was decided that  the handover would take place at the beginning of 
this meeting.  Accordingly, she proposed that  the Committee elect Mr Quan ZHAO (China) as the 
Chairperson of the Committee.   The Committee so decided. 
B. DEDICATED DISCUSSION ON TRADE IN FINANCIAL SERVICES AND DEVELOPMENT  
3. The Chairperson said that following a proposal by China, at the meeting held on 16 
November 2010, the Committee had agreed to hol d a Dedicated Discussion on Trade in Financial 
Services and Development.  The proposal consisted of two elements: a review of the literature on the 
role of trade in financial services in economic gr owth and development, to be prepared by the 
Secretariat to serve as background information;  and a dedicated discussion among Members on the topic.  He recalled that the purpose of the discussi on was to allow Members to share their experiences 
and perspectives on the relationship between trade in financial services and economic development, 
concerning inter alia  the impact of the liberalization of trad e in financial services on economic growth 
and development, the relationship between internati onal and domestic liberali zation of the financial 
sector, and the role of financial sector policy a nd regulation in promoti ng economic development. 
4. Two documents had been issued prior to the meeting in order to facilitate delegations' 
preparations: a Background Note by the Secretariat (S /FIN/W/76);  and an Informal Note by the Chair 
(JOB/SERV/72), dealing with organizational matters. 
5. A member of the Secretariat introduced the Background Note.  He explained that, as 
requested, the Note focused on the relationship between  trade in financial services – that is, the supply 
of financial services by foreign suppliers through any of the four modes of supply – and economic 
development.  An attempt had been made to narro w down as much as possible the topic, in line with 
the specific request, and to focus on issues that are of prime interest to the Committee.  The Note 
contained, however, a brief introduction to the broader relationship betw een financial sector 
development and economic development.  
                                                      
1  This document has been prepared  under the Secretariat's own responsibility and without prejudice to 
the positions of Members and to their rights and obligations under the WTO. S/FIN/M/68 
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  6. This relationship had interest ed economists for a long time.  A large body of empirical 
evidence had been built since the early 1990s sup porting strong linkages between financial sector 
development and growth.  While there were a few studies which challenged this consensus, the vast 
majority did provide support for a causal link.  Th is introductory section described some of the cross-
country empirical evidence that had been produced.  He clarified that the paper focused on such cross-
country studies.  Members could complement th at with their own – national – experiences and 
perspectives.  
7. Increasing attention had also been paid over recent years to the impact of financial 
development on income distribution and poverty re duction.  Theory provided, however, conflicting 
predictions in this regard, and the em pirical evidence was so far limited.  
8. Section III of the Note reviewed the empirical  literature – cross-country studies – on the 
relationship between trade in financial services a nd economic development.  Allowing the supply of 
financial services by foreign suppliers might stim ulate financial development and thereby spur 
economic growth for at least three related reasons :  1) improving access to international capital;  2) 
enhancing the availability and qualit y of financial services;  and 3) stimulating improvements in both 
financial policy and financial infrastructure. 
9. Only few studies investigated the direct link be tween trade in financial services and economic 
growth, by looking at the impact of the elimination of restrictions on trade in financial services on economic growth.  They all found a positive relations hip.  Recent studies had also focused on the 
relationship between foreign bank entry and access to credit.  The evidence in this field was still 
limited though, and there was more to be done. 
10. The fourth section raised the main policy issues, including financial regulation and 
supervision, market contestability and competiti on, state-owned financial institutions, access to 
financial services, and the sequenci ng financial sector reforms.    
11. The discussion on the relationship between trad e in financial services and development was 
extremely important since it might affect not only the decision of policymakers to pursue financial 
sector reforms, but also their choice of financial sect or policies.  The topic was admittedly vast, with 
many potential ramifications.  This Note was only a first approximation, as targeted as possible to the 
request made by the Committee.  Members might wish to provide their own views on the issues 
raised, develop some of these further, and even identify new issues for discussion. 
12. The representative of China said that the dedicat ed discussion would allow Members to have 
a better understanding on the role that trade in fi nancial services played in economic growth and 
development, and on how to develop trade in financial services so that its benefits were maximized 
and associated risks reduced.  
13. The Background Note prepared by the Secretar iat was valuable, informative and thought-
provoking. She shared the view in the Note that th e financial sector was an important contributor to 
overall economic development.  She drew Members' attention to a dedicated discussion on the 
financial crisis and trade in financial services he ld on 29 June 2010 in the Committee, in which an 
empirical study by the IMF had been presented, s uggesting that excessive growth of financial assets 
incompatible with the real economy and lack of s upervision of the financial services sector could lead 
to market failure. According to that study, three main reasons explained wh y the two Asian banks in 
the sample (Hong Kong, China and Singapore) had fared better than the European ones (Iceland, 
Ireland and Switzerland):  first, they were in a high-growth and high-savings region, which made 
these banks sounder;  second, they were subject to stronger regulation;  and third, the banks were 
more conservative and risk-averse, as a result of the previous crisis in Asia.  Banks in the two Asian 
economies had less leverage, more liquid assets, and we re better capitalized.  Some important policy  S/FIN/M/68 
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  lessons could be drawn from this experience:  it wa s important to have strong regulation and robust 
supervision;  and subsidiarizati on of foreign banks could be necessary, particularly in the case of 
banking systems with extensive foreign bank opera tions.  The study further stressed that excessive 
finance could do harm to the economy and hinder deve lopment in a dramatic manner, but that a stable 
financial sector could contribute to development.  How to strengthen the financial sector so that it 
could promote development was a challenge for every economy.  
14. The Background Note by the Secretariat made  the point that empirical evidence on the 
specific relationship between trade in financial servi ces and development is li mited and the linkage is 
indirect.  The reasons could be that the role of  foreign banks had been controversial, and the 
experiences of financial services liberalization in de veloping countries were mixed.  On the positive 
side, the presence of foreign banks could improve  access to international capital, produce positive 
spill-over effects (such as increasing efficiency and innovation), as well as compel the competent 
authorities to improve the regulatory framework and enhance regulatory capacity.  Nevertheless, there 
were also some drawbacks:  foreign banks tended to serve only high-value customers, foreign capital 
might flee the country during crises, (undermining th e host country’s financial stability), and changes 
in economic conditions in the foreign bank’s home c ountry might have a negati ve effect on the bank's 
activity in a host market.  
15. For all these reasons, the opening up of financia l sectors should be gradual, in line with the 
level of development of regulatory frameworks.  Li beralization strategies must go hand in hand with 
increased regulation, effective supervis ion and enhanced capacity building.  
16. China's financial sector liberalization had started more than 30 years ago, taking a leap when 
China acceded to the WTO in 2001.  China had made extensive commitments upon accession.  In the 
case of banking, all measures restricting ownership,  operation, and the juridical form of foreign 
financial institutions, including on internal branch ing and licences, had been removed.  She said that 
criteria for authorization to deal in China's financial services sector were solely prudential.  At the 
time of China’s accession in 2001, it appeared to be a very high price to pay.  Nevertheless, thanks to 
the efforts made by the competent authorities to improve the regulatory framework, as well as a 
gradual liberalization approach, the impact  on the domestic industry was minimized. 
17. Over the past decade, the overall competitiv eness of the financial sector had improved, 
corporate governance and risk control mechanism had been upgraded, and the prudential supervision 
framework had been enhanced gradually. 
18. China had faithfully implemented its accessi on commitments and continuously allowed 
foreign banks into the domestic market.  As of end 2010, 216 representativ e offices had been opened 
by 185 banks from 45 countries and regions, and 90 branches were being operated by 74 banks from 
25 countries and regions.  In addition, there were 37 wholly foreign-owned subsidiaries, two joint 
venture banks (maintaining six branches and one subs idiary), and one wholly foreign-owned finance 
company.  Total assets of foreign banks reached RMB1.74 trillion, the liquidity ratio stood at 
61.49 per cent, after-tax profits amounted to RM B7.785 billion, the non-performing loan ratio was 
only at 0.53 per cent and the capital adequacy ratio amounted to more than 18 per cent. 
19. Strict prudential regulation was a key element in the process of liberalizing the sector.  In the 
rapidly changing financial markets, the China Banking Regulatory Commission (CBRC) adhered to 
simple and clear-cut prudentia l supervisory policies and instruments, focusing on traditional 
indicators, such as corporate governance structure,  capital adequacy, liquidity, non-performing assets, 
provisioning and information disclosure.  
20. In recent years, the CBRC had embarked on a series of risk supervision measures, including 
on capital adequacy, liquidity and concentration of  large exposure.  The CBRC had also introduced S/FIN/M/68 
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  macro prudential supervision and b ecome an official member of the Financial Stability Board (FSB), 
the Basel Committee on Banking Supervision (BCBS), and fully participated in the dialogue on 
financial supervision policies under the framework of both institutions. 
21. To sum up, China attached great importance to  constantly improving the country's regulatory 
framework, assessing each step of liberalization careful ly against the regulatory capacity before taking 
a final decision.  Unless the authorities had a fu ll understanding of the regulatory situation and 
associated risks, it would not be desirable to a ttempt liberalization steps.  The Chinese competent 
authorities would take this approach with regard to  the remaining few reservations in sectors such as 
securities and insurance.  China’s statutory auto insurance market was less than a decade old and it 
would still take some time for the competent author ities to gather data and analyse potential risks.  
22. It might not be wise, therefore, to push too hard on developing countries such as China to 
open their financial markets before they had an  appropriate regulatory framework and had built 
capacity to tackle the ensuing challenges.  A collapsed market was in nobody’s interest.  
23. Finally, she offered some thoughts on how trade in financial services could contribute to 
development.  For one, geographically differential tr eatment could help trade in financial services to 
promote development in underdeveloped regions.  China had a vast development gap between the 
coastal regions and interior provinces.  The CBR C established a "fast lane", as an autonomous 
liberalization measure, to facilitate the establishm ent and supply of financial services by foreign 
financial institutions in underdev eloped regions.  There could also be policies encouraging foreign 
financial services suppliers to provide servi ces to SMEs, or engage in microfinance. 
24. The representative of the European Union said th at opening up a country's financial services 
sector contributed positively to economic growth an d development.  The EU experience showed that 
allowing market access led to increased competition in the sector, lower costs, more innovation, less 
information asymmetries, and the incorporation of  technical knowledge and skill.  The development 
of the financial services sector was positively co rrelated with economic growth, as evidenced by the 
literature review contained in Section II of th e Background Note prepared by the Secretariat. 
25. New Member States had joined the European Un ion at various stages of development;  many 
of them moved from a completely closed financ ial sector to a highly liberalized one.  Following 
accession, foreign financial institutions increased  their participation in these countries through 
ownership of institutions, financing of activities and in vestment.  In addition, significant consolidation 
had taken place, particularly in  banking, and this process had c ontributed to the soundness and 
stability of these countries' banking systems.  Conso lidation had also occurred in stock markets.  For 
example, the three Baltic stock markets had merged  with the Scandinavian OMX market and used a 
common trading platform.  As a result, research on the link between financial development and economic growth in the EU-25 showed that signifi cant gains accrued to the new EU Member States. 
26. Deeper credit and capital markets spurred econo mic growth and productivity, and contributed 
to poverty reduction.  These benefits were brought about by the reduction of transaction costs between 
operators, the facilitation of capital inflows and re mittances from abroad, the mobilisation of savings 
and better management.  Access to financial services in the course of financial development was also 
key to poverty reduction:  savings could be productively used while insurance and access to credit 
minimized negative effects of unexpected fluctuations in income. 
27. In addition, trade liberalization in the financia l services sector helped improve the efficiency 
and efficacy of the regulatory environment.  Clea rly, in order to enjoy the advantages of trade 
liberalization in financial services, a robust regul atory and supervisory environment was needed.  
Liberalization and regulation were a two-way stree t:  while new entrants to the market promoted  S/FIN/M/68 
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  innovation and competition;  regulatory systems had to respond to the new challenges, and develop 
and adapt to ensure the smooth functioning of markets. 
28. Concerns had been raised, as highlighted in th e Secretariat's Note, that foreign firms cream-
skimmed and cherry-picked their clients, leading in  fact to less access to finance for SMEs.  The 
empirical evidence on this was mixed, as stated in th e Note.  Even if foreign banks concentrated on 
corporate clients, better access to credit for ma nufacturing benefitted other sectors of the economy 
with a trickle-down effect.  In addition, it ma y force other, less competitive financial service 
operators, to focus on other client segments, thus increasing access to financial services for a wider proportion of the population.  For example, foreign entry in Hungary provided healthy competition for 
OTP Bank, the main domestic bank, and forced it to develop new products and be tter services, such as 
bank cards and ATMs.  By investing heavily in info rmation technology and using its extensive branch 
network, OTP Bank had become the market leader in this new, growing business. 
29. In fact, the EU experience with its new member Sates bore this out.  Dynamic credit growth 
to the private sector in a number of the new EU Me mber States was well above the average rate in the 
euro area post-accession.  The growth of credit to the private sector had been especially strong in the 
Baltic countries and Hungary, where it reached annua l rates of between 30 and 50 per cent in recent 
years.  This credit expansion had, in most of these countries, been financed from both domestic and 
external sources. 
30. All in all, the EU experience supported the S ecretariat's conclusion:  financial sector 
development might indeed make a very important c ontribution to economic development.  In addition, 
ample evidence showed a positive association between trade in financial services and growth. The EU 
shared the Secretariat's view that the discussion on the relationship between trade in financial services 
and development was extremely important. 
31. The representative of India said that the obser vations made in Section II of the Background 
Note on the links between economic development and fi nancial services were apt.  This was also well 
understood in India and was reflected in the focu s put by authorities on financial inclusion.  
32. Section III of the Note, on financial openness, quoted from several papers published before 
the global financial crisis and made a strong case fo r trade in financial services.  While it was well 
understood that openness and trade in financial servi ces were important in a globalizing world, the 
note did not discuss the impact of irreversible commitments made by countries in multilateral and 
bilateral fora.  The paper was also silent on wh ether there was any connection between the global 
financial crisis and financial openn ess, and did not quote any of the recent papers.  It was important to 
note that along with the lack of institutional deve lopment, the impact of financial openness and capital 
flows had also received attention as reasons for the crisis, but the Note was silent on them.  
33. According to IMF reports published after the cr isis, countries experiencing the highest credit 
growth associated with financial libera lisation not only experienced the largest  output volatility 
during the crisis, but also lower average growth.  While the credit boom had generated strong 
growth during the boom-phase, the subsequent bust was so deep that the countries concerned recorded 
slower average GDP growth than others that had not undergone this boom.  Given that much of the 
capital inflows were in the form of loans, these countri es also saw the steepest rise in external debt and 
the largest fiscal deficits.  These long-term costs of the credit boom had not been taken into account 
by the many studies that ended their sample before 2009.  The conclusion that financial openness and rapid expansion of the financial sector was beneficial for growth might thus have been too 
sanguine.
 
34. IMF research on the current crisis showed that larger stocks of debt liabilities and of FDI in 
the financial sector were associated with worse grow th slowdowns.  Countries with larger stocks of S/FIN/M/68 
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  debt liabilities or financial sector FDI fared worse in the current crisis, contrasting with those that had 
larger stocks of non-financial FDI.  The IMF findi ngs on FDI in the financial services sector therefore 
sat oddly with the perceived benefits of financ ial services liberalization as mentioned in the 
Background Note, and needed to be adequately addressed. 
35. Turning to the link between trade and growth, he said that it was clear that other factors apart 
from trade contributed to growth.  This was also noted in paragraph 21 of the Background Note which 
stated that only few studies had addressed the di rect link between trade in financial services and 
economic growth.  Paragraph 26 of the Note mentioned that the ava ilable literature showed that the 
link between banking sector openness a nd economic growth was indirect.  
36. The recent financial crisis also highlighted  how important it was that regulators share 
responsibility for cross-border supervision of financ ial entities.  The crisis made it clear that even 
when problems were international, bailouts tended to  be national.  There was therefore a need to 
develop a clear approach to determine the re lative responsibility of home- and host-country 
supervisors before developing countries agreed to larg e scale liberalisation of fi nancial services.  This 
issue had not been highlighted in the Note. 
37. The crisis had also shown, as mentioned above , that in countries where foreign banks had 
acquired large market shares at the expense of domes tic banks in the boom years, when the crisis hit 
their home countries, the foreign banks tended to subs tantially curtail their operations in, or withdraw 
from, the host country.  The Indian experience in this regard was no exception as foreign banks had 
withdrawn substantially from credit markets.  
38. In India, foreign banks had not only withdrawn from the credit market, but also hoarded 
liquidity in their head offices.  The events demons trated that when a banking group got into difficulty, 
liquidity which was believed to be available to the whole group could be hoarded by the parent or, in some cases, seized by local authorities intervening to protect their own depositors.  This was often 
exacerbated after the collapse of the group, as liquid ass ets were retained within the parent either by 
the management or due to actions of local aut horities, which might contravene group assurances or 
even cross-border agreements and international obl igations.  There should therefore be a calibrated 
approach in opening up the domestic banking system to foreign banks.  
39. The paper also noted that there was a long-st anding concern that foreign banks engaged in 
cream-skimming and cherry-picking practices, supplying services only to high-value customers, and thus undermining the financial condition of domest ic banks, which would end up serving low-value 
(and more risky) customers.  In principle, this  competition could be so destabilizing that some 
domestic banks would go out of business, and the overall level of credit in the host country might 
decline.  In India, foreign banks were present with only five rural branches and six semi-urban 
branches but had opened 299 urban and metro bran ches, with 238 branches in metropolitan cities. 
Given India's current focus on financial inclusi on, foreign banks' concentration in metropolitan 
centres might put the entire onus on domestic banks, with foreign banks supplying services only to 
high-value customers, as noted in the Background Note.   
40. In contrast to the global scenario, India had by and large avoided financia l contagion.  Even in 
the midst of the crisis, the Indian financial sector had remained safe and s ound, and financial markets 
continued to function normally.  Financial stability had been achieved through prudential policies that 
prevented institutions from excessive risk taking,  and financial markets from becoming extremely 
volatile and turbulent.  In his view, India's pr udent approach to financial liberalisation and 
globalisation had stood the test of time. 
41. There was a need to further work on the Background Note, so as to include countries' 
experiences and update it with the latest studies on th is issue.  To balance the debate, as noted in  S/FIN/M/68 
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  paragraph 10, the Note should include studies wh ich found a weak relations hip between financial 
services and growth.  In conclusion, the issue should be discussed with an open mind and Members 
should share their experiences in order to deepen th eir understanding of the role played by this very 
important sector. 
42. The representative of Japan said that the Backgr ound Note was concise and informative.  It 
kept the right balance in presenting various studies.  Paragraph 41 was very important as it referred to 
studies demonstrating the positive impact of financ ial sector development and of liberalization of 
trade in financial services on economic growth.  She also agreed with the findings in the Secretariat 
Notes that financial services contributed to economic  growth.  Specifically, growth could be achieved 
via two routes:  (a) supporting economic activities,  and (b) facilitating asset management and risk 
diversification. 
43. In order to achieve sustainable economic grow th, it was essential to improve access to credit 
not only for large corporations, but also for small an d medium sized enterprises (SMEs).  At the same 
time, it was important to mobilize savings efficien tly.  Diversification of both funding sources and 
financial instruments was therefore crutial.  In  this regard, since 2003 Asian countries had been 
promoting the "Asian Bond Markets Initiative" with in the framework of "ASEAN plus 3".  This 
initiative aimed to develop effective and liquid bond markets in Asia, t hus mobilizing abundant 
savings for investment in the region.  The initia tive had contributed to the recent increase in bond 
issuance in the region, and to the divers ification of issuers and instruments. 
44. During the Uruguay Round negotiations, Japan ha d faced enormous pressure to liberalize 
trade in financial services.  As a result of th ose negotiations, Japan had liberalized its market 
significantly, and its commitments were among the most  extensive.  Efforts to further liberalize the 
Japanese financial market had continued after the Uruguay Round.  In hindsight, liberalization under 
the WTO and other deregulation initiatives had facili tated competition between foreign and domestic 
financial institutions, and improved the quality of fina ncial services available to consumers.  In her 
view, therefore, liberalization pr oduced substantial benefits.  
45. Some general lessons might be drawn from Jap an's experience. Liberalization of mode 3 
stimulated sound competition between foreign and local financial institutions, thus improving the 
quality of financial servi ces and facilitating the transfer of skills and know-how.  Moreover, the 
presence of foreign banks led to increased direct in vestment in manufacturing and other industries, 
contributing to local employment, transfer of  technology, and export competitiveness.  The 
liberalization of services like reinsurance and Mari ne, Aviation and Transport (MAT) insurance under 
modes 1 and 2 was of particular importance.  Open ing cross-border transactions in these areas played 
a vital role in strengthening the underwriting capac ity of insurers through risk diversification. 
46. It was extremely important to strike the right balance between liberalization and regulation.  
Laws and regulations on financia l services should be updated and im proved continuously, reflecting 
market changes and financial innovation.  In th is respect, Japan had continued to improve its 
regulatory framework in light of the development of financial markets and international discussions 
on regulatory reforms.  In addition, measures had al so been taken to facilita te access to credit for 
SMEs.  However, excessive regulation could hamper innovation in financial services.  In turn, that 
could adversely affect not only financial services suppliers, but also consumers and even overall 
economic growth.  Efforts to improve transparency  and predictability of regulations were also 
necessary to enhance the quality of financial services.   It was important to listen to the views of 
financial services suppliers and market participants when changes to regulations were envisioned.  
47. Finally, the representative expressed the hope that the discussion could serve to deepen 
Members' understanding of trade in financial services and development. S/FIN/M/68 
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  48. The representative of Hong Kong, China said th at the Background Note by the Secretariat 
was informative and useful.  It contained a thor ough literature review, hi ghlighting many pertinent 
issues regarding the relationship between fina ncial sector development and overall economic 
development.  He noted in particular the referen ce in paragraphs 15 to 18 to the negative relationship 
between the level of financial sector development and poverty, which pointed to the relevance of a 
good allocation of financial resources when pursu ing policies aimed at reducing inequalities and 
alleviating poverty.  The same section showed th at available evidence on the relationship between 
financial sector development a nd overall economic development was inconclusive.  It was indeed 
difficult to prove whether financial sector de velopment was the driver of overall economic 
development or vice versa.  According to the lite rature, the direction of causality was not entirely 
clear.  
49. However, in his view, Members should not lose sight of the high correlation between 
financial services sector openness and economic grow th, as shown in paragraphs 22 to 25.. It was 
probably not so relevant what came first - financ ial sector development or economic growth. As noted 
by China and India, further literature reviews, pa rticularly of studies produced after the financial 
crisis, would further enlighten Members about the complicated relationship between financial sector 
and overall economic development. Finally, he agreed with most of the policy issues raised in Section 
IV of the Secretariat Note.  He noted in partic ular paragraphs 33 (on the importance of ensuring a 
stable political and macroeconomic environment), 34 (on the need to have a sound infrastructure, 
including inter alia the solvency regime, the protectio n of creditor rights, the enforcement of contracts, 
accounting systems, and information disclosure), an d 35 and 36 (on the crucial importance of sound 
regulation and supervision).  Hong Kong China was a clear example, in his view, of a successful 
interaction between open markets and regulation.  In fact, no limitations were imposed on the 
participation of foreign financial institutions in th e market, and in spite of recent crises, that policy 
had not been reversed.  Instead, regulation and supervision had been continuously strengthened, 
something highlighted in the IMF study presented last year during the dedicated discussion on the 
financial crisis.  Finally, he considered that  further discussion was necessary on the relationship 
between financial sector regulation and liberalization. 
50. The representative of Australia said that financial services helped facilitate transactions, pool 
and allocate financial resources, and manage ri sk, among other functions.  Given the diverse 
involvement of these services in the broader economy,  it was crucial that they were supplied in a 
competitive, efficient and stable environment to en sure ideal conditions for economic development.  
The Secretariat Background Note was very clear in  drawing out the developmental role of the 
financial sector based on a strong body of literature.   
51. Turning to Australia's experience, she said that the country had moved from a relatively 
closed financial sector to one of the most open in the world.  Since the st art of the liberalization 
process in the 1970s, Australia had developed a good a pproach to regulation in this important area — 
regulation that provided a sound pr udential underpinning to ensure th e stability of the sector while 
being the least trade restrictive possible.  Importa nt steps to manage market opening and the necessary 
regulation had been taken in the 1970s, culminating in a major review - the Wallis review of 1997.  
This review was important since it developed th e "twin peaks" model of separate prudential and 
investment/securities regulators, which had proven successful. 
52. Australia was one of the few countries to weathe r the global financial crisis successfully with 
no recession and no bank failings.  Contrary to the anal ysis of some other Members at this meeting, 
Australia's experience showed that an open and well-regulated financial services market could withstand a financial crisis. 
53. The Australian financial sector was an important  contributor to national output, employment, 
economic growth and development.  The sector ac counted directly for around 11.1 per cent of GDP,  S/FIN/M/68 
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  and employed directly around 399,000 persons, or 3. 5 per cent of total employment.  Indirectly, it 
employed a substantially larger number, by way of outsourced legal, accounting, administration, 
processing and other services.  Also, the financial sector’s contribution to economic growth and output was much more important than these statisti cs suggested.  The sector was at the core of the 
economic system, providing a range of services n ecessary for other domestic and trade-related 
industries to function efficiently and enabling cons umers to effectively manage their consumption-
savings requirements over time.  While economic gr owth tended to induce further financial sector 
growth, empirical research demonstrated a well- established causal link from financial sector 
development to economic growth.  This was well drawn out in the Secretariat's Background Note. 
54. The Background Note posited that there was re latively scant literature on the relationship 
between trade in financial services and developmen t.  Her delegation was working on a background 
paper on the Australian experience to date.  Financia l services exports were now an important part of 
the Australian trade profile, accounting for over $1. 2bn of services trade, with strong potential for 
growth.  Since the start of the liberalization pro cess, Australia had developed strong financial market 
expertise, a large pool of assets under management , and strong regulation.  These elements would 
underpin its further development, including the estab lishment of Australia as a financial hub in the 
region. 
55. The representative of Ecuador said that his au thorities were still analysing the Background 
Note prepared by the Secretariat, and he was ther efore not in a position to make specific comments.  
He was pleased however that such a discussion had b een organized, and hoped to be in a position to 
share Ecuador's experience at a future meeting.  As he had indicated on previous occasions, trade 
liberalization was not an end in itself but a tool for the achievement of economic growth and 
development.  
56. The importance of an effective and modern fi nancial sector could hardly be denied.  The 
Background Note provided ample evidence in that regard.  It was precisely due to the unique 
character of this sector that the liberalization pr ocess should proceed cautiously.  The most important 
arguments in favour of a cautious approach included the following:  firstly, the role played by foreign 
financial institutions in a country's economy and th e undesirable consequences that could ensue if 
these took up the biggest share of the market;  secondl y, the impact of large foreign financial suppliers 
in situations where domestic ones could not rely on similar resources;  thirdly, the fact that foreign 
financial suppliers tended to focus on the most profitable segments of the market, thus affecting 
access to credit by other economic agents, particularly in rural areas;  and, finally, the need to have a 
sound regulatory and supervisory framework befo re embarking on a liberalization process.  
57. The representative of the Republic of Korea said that, as correctly pointed out in the 
Secretariat Note, there was a strong positive corre lation between financial sector development and 
economic growth.  Korea provided a good example in that regard. 
58. Without denying the important contribution of financial services to economic development, 
he noted some caveats.  The recent expansion of  the financial sector and the associated excessive 
leverage of financial in stitutions had brought about the global fina ncial crisis.  The underlying logic of 
the expansion policy was that financial services should  play a more active role as a driving force of 
economic development.  After the global financia l crisis, the international community was now 
reconsidering this issue.  In particular, there was a growing recognition that countries should go "back 
to basics", meaning that the financial industry shoul d stick to its traditional role as a supplementary 
industry, rather than a main driving force of economic development. S/FIN/M/68 
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  59. The representative of Thailand noted that the Communication submitted by her delegation in 
20022, and quoted in the Informal Note by the Chai rperson concerning this dedicated discussion, was 
originally intended to provide factual information on financial services in the Thai economy.  It was a 
contribution to the assessment of trade in services conducted in the Special Session of the Council for 
Trade in Services, without prejudice to Thaila nd's position in the services negotiations.  The 
Communication provided a broad and factual picture of the early stages of financial sector 
liberalization in the early 1990s, turning then to the financial crisis in 1997 which had led to strong 
measures recommended by the IMF.  Those measures inevitably affected the Thai economy.  Although that episode had happened more  than a decade ago, some less ons learnt were still relevant.  
At present, the Thai Ministry of Finance and the Bank of Thailand were focusing on policies aimed at 
ensuring the soundness of the financial system, so th at global innovations and developments could be 
incorporated and dealt with in an effective manner.  
60. The representative of Turkey said that the Bac kground Note could be further developed to 
include the most recent literature.  A study by Demirgüç-Kunt had found that the functioning of 
foreign banks relative to domestic banks was differe nt in developing and developed countries, with 
foreign banks achieving higher profits than domestic banks in the former countries and lower profits 
than domestic banks in the latter countries.  This finding deserved some attention. 
61. Foreign direct investment had been on the rise in developing countries since the 1990s.  
Liberalization and de-regula tion were major factors stimulating this  process.  Foreign participation in 
the national banking sectors of developing countries ha d been intense in countries with high economic 
growth rates and soaring income potentials in South America, Far-East Asia and Eastern Europe.  In 
today’s world, mature markets of developed countr ies were not growing as fast as before.  Achieving 
significant profits was steadily getting more complicat ed in developed markets with low net interest 
margins.  Besides, rivalry from other sectors, such  as capital markets and insurance, was redirecting 
developed-country banks with a wide capital base to wards other markets.  In contrast, capital was 
short in developing countries.  Despite economic in stability, dynamics in deve loping countries made it 
necessary to achieve high economic growth.  In th is context, higher interest rates in emerging 
economies increased the attractiveness of  these markets for investors.   
62. Out of 48 banks operating in Turkey, 10 were  foreign deposit banks, three were foreign 
participation (Islamic) banks, six were foreign deposit bank branches, and four were foreign 
investment banks.  Taking into account bank acquisiti ons in recent years, the total asset share of the 
foreign banks reached 40.2 per cent in December 2010.  
63. Despite concerns and drawbacks, foreign partic ipation in the banking sector was mounting in 
parallel to the globalization process.  Regional integr ation was also encouraging this process.  Foreign 
banks were especially willing to enter markets that attracted foreign direct investment.  Under such 
circumstances, it was necessary to increase and intensify the competitiveness of domestic banks so 
they did not become dominated by foreign rivals. 
64. In insurance, there were 36 companies with dir ect and indirect foreign capital participation, 
up from five in 2005.  The market share of those companies was 51.68 per cent in 2010, up from 6.6 in 2005.  Increasing shares of foreign capital did not directly contribute to a rise in premiums. 
65. Only little research had been done on the impact of financial openness on the Turkish 
economy.  This was due to the fact that, although the regime had been liber al since the 1980s, foreign 
shares in financial institutions never reached remark able levels until recently.  In fact, they were 
below 5 per cent both in banking and insurance till the first half of 2000.  According to an 
econometric analysis conducted by the Turkis h Banking Regulatory and Supervisory Agency 
                                                      
2 Assessment of Trade in Services, Communication from Thailand (TN/S/W/4).  S/FIN/M/68 
 Page 11 
 
 
  (BRSA), financial liberalization had not had any ta ngible effect on financia l development.  Basic 
reasons were to be found in economic instability, hi gh inflation rates and inconsistent implementation 
of macroeconomic policies.  There were, however, quite a lot of articles on how early capital account 
liberalization, which was another aspect of financia l liberalization, had severely affected the Turkish 
economy in times of crisis.  An interesting outcome of the study referred to was that public ownership 
of banks had had a positive effect  on financial development in Tu rkey.  She would provide more 
information based on recent data at the next meeting. 
66. The representative of Argentina stated that th e Background Note was of high quality.  This 
was a vast issue, which called for further consideration by Members.  If the Committee were to 
continue with this discussion, attention should be given to the comments made by the representatives 
of China, India, and Ecuador as well as to the refe rence by the EU representative to the benefits 
accruing from the presence of foreign financial instituti ons.  He then asked the Secretariat about the 
definition of trade in financial services used in the literature survey.  While paragraph 2 of the 
Background Note defined trade in financial service s as "the supply of financial services by foreign 
suppliers through any of the four modes of supply", paragraphs 20 and 21 seemed to use a definition 
based on the actual liberalization of such trade.  Fo r example, paragraph 21 of the Note indicated that 
"[o]nly a few studies have investigated the direct lin k between trade in financial services (or, rather, 
the liberalization of restrictions on trade in fina ncial services) and economic growth".  He therefore 
wondered what definition was actually used.  For exam ple, in paragraph 26 reference was made to the 
study by Bayraktar and Wang (2008)3, who had found that the asset share of foreign banks had an 
economically and statistically significant positive eff ect on the growth rate of GDP per capita.  In 
addition, he asked the Secretariat whether it ha d found studies that focused on the relationship 
between the actual supply of financial services by foreign suppliers and economic growth, and not 
only on the relationship between financial services liberalization and economic growth.  Such studies 
could provide a clearer indication of the actual gr owth effects of the supply of financial services by 
foreign suppliers.  
67. The representative of Norway said that between  1970 and 2010, the assets of all Norwegian 
financial institutions increased from a size equivalent to that of GDP (Mainland Norway) to 3.5 times 
the size of GDP.  However, the total assets of No rwegian credit institutions were still moderate by 
international comparison, amounting to 2.8 times the size of GDP (Mainland Norway).  
68. Foreign suppliers held a substantial share of  the Norwegian financial market, both through 
branches and subsidiaries.  Non-life insurance wa s dominated by foreign companies, of which the 
Swedish non-life insurer If and the Danish Tryg-Vest a had large market shares.  In terms of gross 
premium revenues, foreign branches had a 42 per cen t share of the non-life in surance market.  In 
terms of total assets, foreign institutions held a 26 per cent share of the credit institutions market, 32 
per cent share of the non-life insurance market and 7 per cent of the life insurance market.  
69. In a paper published in March 2006 in the Finance and Development magazine, the IMF 
stated that trade was an opportunity, not a guarantee.   As argued in the Background Note, allowing the 
supply of financial services by foreign suppliers  had an effect on economic growth, through, inter 
alia, increased investments, improved resource allocation and better diversification of risk.  At the 
same time, a more open regime and the presence of foreign companies would increase the authorities’ 
need to focus on macroeconomic stability and impr ove regulation and supervision of the financial 
sector.  The crucial importance of financial sector regulation and supervision was also emphasized in 
the Secretariat’s Note. 
                                                      
3 Bayraktar, Nihal and Yan Wang (2008).  "Banking Sector Openness and Economic Growth," The 
Journal of Applied Economic Research,Vol. 2, No. 2, pages 145-175. S/FIN/M/68 
Page 12  
 
  70. A financial crisis could be tr iggered by domestic conditions,  external factors or a combination 
of both.  Norway experienced a banking crisis in  the early 1990s following the deregulation of 
financial markets.  This was, however, before the fi nancial market had been opened to foreigners.  As 
both the Norwegian banking crisis in the 1990s and the recent international financial crisis had 
demonstrated, sound regulatory policies for prudential reasons were crucial to safeguard the integrity 
and stability of the financial system.  Some of the ro ots of the recent financial crisis might be found in 
the strong growth of financial products and inst itutions not subject to regulation, prudential 
supervision and capital requirements.  It was crucia l to close these gaps and ensure that the whole 
financial sector was subject to supervision and regulation, and th at the regulation of different 
segments of the market was consistent, based on th e principle of 'same risk, same regulation'.  All 
relevant financial actors and all types of financial instruments needed to be subject to appropriate 
regulation and oversight.  The organisation and stru cture of financial supervision had been discussed 
in many countries in the aftermath of the crisis.  The Norwegian model, which integrated supervision 
of all types of enterprises in a single body, had proven appropriate to the circumstances. 
71. Recent research suggested that trade in services might also lead to productivity growth in 
other sectors.  This was the case of financial services, which were inputs to production in other 
sectors.  For instance, ships or vessels transported a very high portion of the world’s traded goods.  
The development of an open and competitive regime  for marine insurance could therefore contribute 
to lower total costs, and help stimulate trad e in goods and general economic development.  
72. The representative of the United States noted th at the literature review by the Secretariat 
revealed the strong causal link between financial sector development and economic growth.  The 
same conclusion had been reached by the World Bank in its 2001 book "Finance for Growth".  The 
Note usefully highlighted work done to inves tigate the positive effects on economic growth of 
removing restrictions on entry by foreign financial services suppliers. 
73. Results of academic studies, both theoretical a nd empirical, were unambiguous:  the entry of 
foreign financial services providers stimulated  competition, broadening access to credit and 
contributing to economic growth.  So me delegations had complained that the Secretariat Note did not 
cover the financial crisis, but Members should recall that the focus of this discussion and this Note 
was on the relationship between trade in financial ser vices and development.  Indeed, the Secretariat’s 
Background Note on Financial Serv ices (S/FIN/W/73 and Corr.1) contained a whole section on the 
financial crisis, and cited a numbe r of studies relating to it.  The conclusion by the Secretariat was 
worth noting:  previous discussions suggested that no ne of the root causes of the financial crisis could 
be attributed to services trade liberalization as pr ovided for in the GATS, namely granting market 
access and national treatment. 
74. This clear link between financial sector openness and economic development was one reason 
why the United States had urged that financial services be an important component of the Doha Development Agenda negotiations.  He finally st ressed that undertaking commitments regarding the 
treatment of foreign firms did not undermine or rest rict Members' ability to implement sound financial 
sector regulation.  
75. Invited by the Chair, representatives of the Secretariat addressed comments and questions 
raised.  A representative of the Secretariat said that, from the GATS perspective, services trade 
liberalization meant the elimination of six types of limitations to market access, as well as measures 
contrary to national treatment, and only with respect  to trade in the sectors included in the Members' 
schedules of specific commitments.  That was a very specific definition of trade liberalization, which 
was certainly not synonymous with deregulation. Actually, the more an economy liberalized trade, the 
more regulation was needed.  The only purpose of trade liberalization, as defined by the GATS, was 
to introduce competition.  But liberalization, and th erefore competition, was only one element of the 
policy mix.  In his view, liberalization was no panacea, and no one should expect that just by  S/FIN/M/68 
 Page 13 
 
 
  liberalizing trade benefits would automatically fo llow. Liberalization withou t appropriate regulation 
was not advisable.  Research conducted not only by  the WTO but elsewhere had generally confirmed 
that the root causes of the Asian and the more  recent financial crises lied with regulatory 
shortcomings, and not with the introduction of comp etition in markets.  Deregulation, or regulatory 
shortcomings, may lead to serious problems. 
76. A comment had been made about the Background Note ignoring the effects of irreversible 
commitments under the GATS.  He said, in reply, that there was no such a thing as "irreversible 
commitments" under the GATS.  All commitments  were reversible, through negotiations under 
Article XXI of the GATS.  But in addition, in the case of financial services, the GATS contained a specific carve-out for prudential measures, which prov ided financial regulators with ample flexibility. 
And that carve-out had been specifically designe d by Members to protect financial systems from 
instability or the threat thereof.  Another observa tion on the Background Note was that it did not refer 
to the link between liberalization and financial crises.  The reason was that it was not deemed useful to repeat what had already been said in a pr evious Background Note on Financial Services 
(S/FIN/W/73 and Corr.1), which already contained a section devoted to the crisis.  Additionally, the 
Committee had had a dedicated discussion on the financia l crisis and trade in financial services, with 
the participation of experts from the BIS, FSB, IMF,  and the OECD.  Another remark made was that 
the Note did not refer to the issues raised by the cross-border resolution of banks.  He clarified in that regard that that issue had been omitted because it di d not seem to fall squarely within the remit of the 
request made by the Committee.  He reminded Member s that a lot of work had been carried out on the 
cross-border resolution of banks by other internati onal organizations, such as the BIS and the IMF.  
77. Another representative of the Secretariat said th at the literature on finance and development 
was vast.  In conducting a review, one had to focu s on that part that came closest to the question 
raised, i.e. the relationship between trade in fina ncial services and development.   The concept of 
development was wider than the concept of economic growth. And the Note recalled that the literature 
on the relationship between finance and poverty allevi ation, income distribution, or inequality was 
more limited than the literature addressing the rela tionship between finance and economic growth.  By 
way of introduction to the issue raised by the Committee, Section II of the Note reviewed the 
literature on the relationship between  financial sector development and economic growth and between 
financial sector development and other aspects of economic development, such as poverty alleviation 
and access to finance.  Financial sector developmen t could certainly not be equalled with trade in 
financial services, but it could, nonetheless, give an id ea of the availability of financial services in the 
economy. 
78. The question had been raised as to whether there were studies available on the relationship 
between financial liberalization (or opening) and fi nancial crises.  He replied that the relevant 
literature had not been referred to in the Backgr ound Note because the defin ition of financial opening 
- usually capital account liberalization - did not matc h the definition of trade in financial services 
under the GATS.  It was important therefore not to confuse the liberalization of trade in financial 
services, as understood in the GATS, with concepts such as financial opening (usually understood as 
capital account convertibility) or financial liber alization (usually understood as interest rate 
deregulation or capital market deregulation).  
79. The questions raised by Argentina were pertinen t.  He was not aware, however, of empirical 
studies looking at the relationship between trade - or  the increase in trade - in financial services as 
defined in the GATS (i.e. the definition contained in  paragraph 2 of the Note) and economic growth or 
development.  The studies that came closest, a nd were mentioned in the Note, looked at the 
relationship between the elimination of restricti ons on market access and/or national treatment and 
economic growth.  The underlying assumption was that the elimination of restrictions would lead to 
an increase in the supply of financial services by foreign financial instituti ons.  A related strand of 
literature had been developed recently on the relati onship between foreign bank entry and operations S/FIN/M/68 
Page 14  
 
  and different variables, such as access to finance,  credit expansion and even economic growth.  The 
paper by Bayraktar and Wang (2008) was an example.   Studies looking at the motivations of foreign 
banks in seeking access to markets were not included because the studies focusing on the ex-post effects of foreign bank entry seemed more directly  related to the request made by the Committee, 
insofar as they considered the im pact of the supply of financial services through mode 3 on economic 
growth.  
80. The representative of China suggested that, taki ng into account the complex nature of the 
issue and the fact that many Members had indicated th at they would contribute at future meetings, the 
item be kept in the Committee's agenda and that  the Chairperson conduct consultations on how to 
organize the discussion. 
81. The Chairperson said that the Committee had a very fruitful discussion on this issue.  
Members had made insightful comments on the Secr etariat Background Note, and some had shared 
their own experience with the liberalization of trade in financial services.  Views from both sides had been expressed:  on the one hand, those who consid ered that trade in financial services, and its 
liberalization, was a significant contributor to ec onomic growth and development; and, on the other 
hand, those who referred to the occurrence of periodi cal financial crises and the need of establishing 
an appropriate regulatory and supervisory framework before embarking on financial services 
liberalization.  Some had also echoed the Secret ariat's finding that only a few studies addressed the 
direct link between trade in financ ial services and economic development. 
82. Some Members had also suggested that it might be useful to continue with this discussion, 
paying attention inter alia  to issues such as the relationship between liberalization and regulation. 
Some delegations, such as Australia, Ecuador and Turkey, had also prom ised further contributions.  In 
addition, China had suggested that the item be left in  the agenda for the time being.  Taking that into 
account, he suggested that the item be kept in the age nda for the next meeting, to give additional time 
to delegations to further study the issue and contri bute to the discussion. In the meantime, he would 
conduct consultations on how to proceed in the future.   
83. The Committee agreed to th e Chair's suggestion.  
C. ACCEPTANCE OF THE FIFTH PROTOCOL TO THE GENERAL AGREEMENT ON TRADE IN SERVICES 
EMBODYING THE RESULTS OF THE FINANCIAL SERVICES NEGOTIATIONS  
84. The Chairperson informed the Committee that on 7 March, the Council for Trade in Services 
reopened the Fifth Protocol until 8 April 2011 to a llow its acceptance by the Philippines, which had 
completed its internal ratification procedures.  That  decision was contained in document S/L/382.  As 
informed by the Director-General in document WT/Let/759, on 16 March the Government of the 
Philippines had deposited the instrument of ratificati on of this Protocol, which had entered into force 
then for the Philippines on 16 March 2011. 
85. The representative of the Philippines took the opportunity to thank the Membership for 
agreeing to re-open the Fifth Protocol.  He confir med that the Philippines had deposited its instrument 
of acceptance on 16 March 2011.  
86. The representative of Brazil said that, as far as his country was concerned, the situation had 
not changed.  The internal procedures had not yet been completed.  
87. The Committee took note of those statements, and d ecided to revert to this agenda item at the 
next meeting.  S/FIN/M/68 
 Page 15 
 
 
  D. TECHNICAL ISSUES  
88. The Chairperson reminded Members that at the last meeting the Committee decided to hold a 
first discussion on classification issues at the next m eeting, on the basis of an informal note by the 
Secretariat drawing from the discussion on classification contained in the recent Background Note on Financial Services (S/FIN/W/73 and Corr.1).  This Note would be circulated as a Job document. 
Delegations interested in specific classification i ssues were invited to contact the Secretariat by 
26 May, so that those issues could also be incor porated in the Secretariat Note.  The discussion would 
be held under this agenda item, in informal m ode, and the Chair would produce a summary after the 
meeting.  
89. The Committee took note of that statement, and d ecided to revert to this agenda item at the 
next meeting. 
E. RECENT DEVELOPMENTS IN FINANCIAL SERVICES TRADE  
90. The Chairperson said that at the last meeti ng the delegation of Barb ados had submitted an 
informal Note entitled "Unintended consequences of  remedial measures taken to correct the global 
financial crisis: Possible implications for WTO compliance" (JOB/SERV/38).  The paper suggested 
amending certain provisions of the GATS in light of  the lessons learnt from the financial crisis.  
While some delegations did not see the need for such  amendments, a few had requested more time to 
consider the proposal.  The Committee had therefore d ecided to revert to this agenda item at this 
meeting.  
91. The representative of Turkey noted that both the Turkish financial regulatory agency and 
Central Bank would like to discuss further the i ssues raised in the Communication from Barbados. 
Unfortunately however, she had not received detailed comments yet.  
92. The Chairperson noted that "Recent Developm ents in Financial Services Trade" was a 
standing item of the agenda, and that Members were  welcome to raise any issue under this agenda 
item at future meetings.  
93. The Committee took note of the statements made, an d decided to revert to this agenda item at 
the next meeting. 
F. OTHER BUSINESS  
94. There were no statements under Other Business. 
__________