BIS releases policy paper on bank restructuring

A small group of senior central bankers from the emerging markets met at the BIS in December 1998 to discuss bank restructuring. Two days of discussion highlighted that managing a banking crisis is one of the most difficult tasks to confront a policy maker. The papers in this book analyse the many different approaches that have been followed but also suggest some conclusions.

Governments and central banks have dealt with banking crises and restructured their banking systems in many ways. There is no panacea: what needs to be done depends very much on circumstances. But some common ingredients of all successful programmes can be discerned. The government must be willing to recognise the scale of the problem as soon as possible. It should strongly support supervisors who want to close insolvent banks (as the supervisors are likely to be subject to strong criticism from vested interests at such times). The government should also, if necessary, be prepared to commit substantial fiscal resources to fixing the problems in the banking system. In both cases early action is likely to prove cheaper in the long run. Transparent arrangements must be adopted at an early stage to deal with non-performing loans so that a core of healthy banks can continue to facilitate economic development. The process of saving the banking system does not necessarily mean saving existing bank shareholders or managers (the moral hazard risks are too great), but it requires pragmatism in devising arrangements that avoid untoward dislocation. Improvements in supervisory procedures are usually necessary to prevent problems recurring.

These guidelines are easier to state than to put into effect. Part of the difficulty is political, but part of it is also conceptual and administrative. It is bound to be hard to predict how specific measures will affect expectations and the incentives of owners to ensure their banks are properly run - which will often be decisive for success or failure. Much will also depend on the macroeconomic environment. Because of this complicated mix of influences, there is a great need for highly-trained and politically independent supervisors to administer effective bank restructuring. Governments need to make sure that adequate resources and the necessary support are provided so that this crucial task can be carried out effectively

This publication is available on the BIS website.