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Draw:viu on cont r experience. Claessens an-id **gIelr** ei analvze alternative franevorks for providing fr-1.n-lal services.

_Scope of permiissible activities._ The integrated banking tolel **AlL** Kommercial iaŽnkingn fully integrated with other **i01ariclal** services, including investment banking) benefits h -r'nancial institutions and consumners. Potential costs, _suci._ a exLendinag the satetv net to nondeposit financial scr i ces, can be miuI-atec with safeg'ards and firewalis, w7i ihequi"e regulatoir enforcement and monitoring. ltre-nationaliv. coun-r.es are moving towsard the *Lfr.graLed<sup>1</sup> T-oib. Thc vwider scope of services appears to **105<05** e fienancial tcaliity and mitigate the nsk of a bQa- ng crisisi _£fcgrce of co^nipe5tv tit; ness and con/estabi!ity (openness t,_ eonipetztioin. C(omperitiveness need not require many fie 'aciai nstitutorons: a concentrated system can be rave e if co-estable. Allow.ing he liberai entry of ne<ori banks ios ers the -raenchise value of (domestic) insti .etrons. but the cvidence suggests that on balance **loW** 0"eietry provides importart benefits. Systems s'oouzi ntC be 0 ercompeti:ive, however. They should al,i'w enough franchi'e va'ue that future profits give **isnLut.ons** an uncen-i-o e to behave prudently.

_Design of sae/ty net._ The design of the safety net is important in the tradeoff between ensuring th-e safety and soundness of financial institutions and allocating resources efficiently. A well-functioning safety net minimizes reguiatory forbearance and gives banks incenitives to act prudently. Owners of financial institutions behave more prudently if they have much at risk, in the form of capital, future expected profits, or their ow.n jcbs.

The wrong safety net, especially the wronig deposit insurance, entails great moral hazard. Large deposit holders are more likely to provide market discipline if thev are not covered by deposit insurance (explicit or iplicit). if disclosure is extensive, and if the accounting frameNvork is adequate.

_Supervision._ Best international practice suggests that supervision of the financial conglomerate should probably be consolidated in one agency. Supervisors should have incentives both to monitor and to take appropriate action. Supervisory salaries should be sufficient, relative to those in the private sector, to attract and retain competent and motivated staff.

i, paner a product or the Financial Sector Stratecy and Policy Group -- is part of a larger effort in the group to study _he~L!_ nir ).a of the financial sector framework for the stability, efficiency, and accessibility of financial services. Copies o **i** paperaai **a** re e tree fromr. the World Bank, 181i8 H Srree NAV, Washington, DC 20433. Please contact Rose Vo, ,PiC9-624 telephcei 202-473-3722, fax 202-522-2031, Internet address hvoltcxworldbank.org. Policy Research ' apers are an posted on the Web at bttp:/r,wwa\.worldbank. orgb-tml, dec/Publications/Worlrkpapers/home.html. Ir a ors 1- . _hbe_ coent- cted at cclaessens(a. worldbank.org or dklingebie!Caworldbank.org. September 1 999. (49 pages)

> _o1r it 'o K-cv_ r _orkiTdg Pap'r Steris doissenmia,c-s the hndorgs of work i, pri,iress to encourage the exchange of ideas about t'sid'Op1i o us s 4,.hiecti ;'5. of ti series is ro get thre hfdindligs sout quickly, euirIf ti,e iesetaions are less than fully oolished. The he os ap''.'i ul ' . )s a) of the auothors sold shoud he cited accordzegl}. The findings, i?teipretations. aiid conclusmons expressed in thris 1re evre_ **_eoy_** _!i.ose oi the authors. 'The'. do not oeces,aril: represent the uiew of the W,orld Bank, its Executive Directors, or the_

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