August 1999
Managing a banking crisis is one of the most difficult tasks to confront a policymaker. Often measures must be decided quickly, sometimes in the eye of a crisis. Almost inevitably, decisions will be guided by imperfect information. This is an intrinsic problem because the very business of banking is built on the possession of information not available to others. Moreover, the various actors may well have an incentive to distort the facts. Because banks lie at the centre of modern economies, policies can have far- reaching implications, political as well as economic. This is particularly true at the present time when so many emerging market economies are simultaneously grappling with banking crises.
These issues were discussed by a small group of senior central bankers at the BIS in December 1998. Two days of discussion highlighted the extent of the challenges and the diversity of approaches to the problems. The country papers that follow highlight the main experiences of specific economies. This paper provides an overview of the main issues.
The paper begins by sketching the structure and recent performance of the banking systems in 23 emerging economies, reviewing the scale of the problems faced and some of the causes. Establishing the true magnitude of the likely losses from bad loans is far from straightforward. This is partly because eventual losses depend significantly on collateral and corporate bankruptcy arrangements. Bank restructuring often has to be accompanied by corporate debt restructuring, which is discussed in the following section. Assistance to banks, which involves balancing short- term concerns about avoiding bank runs and a credit crunch with medium- term concerns about limiting moral hazard and fostering a robust banking system, is then discussed. Deposit insurance, a key instrument to maintain confidence, is examined in some detail. (Other important preventive measures such as supervisory and disclosure requirements are outlined in Annex A.) The first response is often some form of assistance that does not attempt to change the ownership structure: one important issue concerns how various degrees of official intervention should be triggered.
The next section examines the institutional arrangements needed to manage impaired assets. Approaches involving changing ownership - domestic mergers, foreign takeovers and taking banks into state ownership - are then reviewed in turn before the concluding remarks.
| Page | |
| Participants in the meeting | 1 |
| Glossary | 3 |
| Bank restructuring in practice: an overview (50
pages, 351487 bytes) John Hawkins and Philip Turner | 6 |
| Restructuring the banking system - the case of Brazil (9 pages, 64968 bytes) Geraldo Maia | 106 |
| Bank restructuring in China (3 pages, 23434
bytes) Xie Ping | 124 |
| Banking problems: Hong Kong's experience in the 1980s (7 pages, 46576 bytes) Raymond Li | 130 |
| Bank restructuring in Korea (11 pages, 65259
bytes) Dookyung Kim | 143 |
| Policy responses to the banking crisis in Mexico (10 pages, 68209 bytes) Pablo Graf | 164 |
| Development and restructuring of the Saudi banking
system (8 pages, 47443 bytes) Saudi Arabian Monetary Agency | 183 |
| Bank restructuring in South- East Asia (13
pages, 82079 bytes) John Hawkins | 197 |
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