Crisis response: What can the World Bank do?

If you are a development institution, crises are opportunities to display leadership. Troubled countries look for help and advice, and they naturally come to you (unless they are East Asian and you are the IMF).

What can the World Bank offer in these times of unrest? First, a little money. In previous crises, the World Bank increased lending by up to $20 billion. This time around, it could even be $30 billion. This is still peanuts relative to the $200 billion the IMF is talking about; and certainly relative to the size of the crisis. To make a simple comparison, rich countries so far have announced various packages for their troubled institutions worth about $9 trillion. In the money game, the World Bank will be a team player in packages someone else typically finances.

Then there is knowledge. There are three offerings here. First, crisis preparedness. The World Bank has developed and is now implementing a series of crisis preparedness exercises for officials in emerging markets, to simulate crisis response. These vary from a two-day to a two-week to a four-month exercise, and the goal is to get people working together, including on communication with the media and the public, and come up with sensible solutions. This is little solace for countries already in crisis, but is useful for countries who are now getting worried the "financial tsunami" (Greenspan's trite description) would not spare them.

Second, crisis management. The World Bank has expertise as an arranger of support packages, which may become handy in poorer countries and in countries where working with the IMF is anathema. This skill is particularly useful when some of the financiers are sovereign wealth funds or governments of cash-rich emerging markets, where the World Bank has good reputation and experience. Another crisis management tool is troubled banks' work-outs: separating good from bad assets, organizing asset management companies, etc. In short-, mid- and long-term responses. Here the Bank has significant expertise and a proven track record (as does the IFC).

Third, ideas about how the future financial sector would look (post-crisis). What reforms are needed not just to overcome the crisis but also to ensure the seeds of the next crisis are not planted when trying to resolve this one? Here, new ideas concern the likely deleveraging of financial institutions and corporations, the likely renewed interest in the development of local financial markets, the search for finance at home of larger corporations and hence the squeeze on smaller businesses and perhaps households, the re-invention of investment banking into a more Lazard Freres type advisory banking without large balance sheets, the role of credit agencies, etc. Papers on these topics are already in progress and you will soon see some thoughts posted on Crisis Talk.