Banking system failures in developing and transition countries: Diagnosis and predictions

BIS Working Papers No 39
January 1997
Understanding what caused the recent costly wave of banking system failures in developing and transition economies is the key to preventing a recurrence. It is important to distinguish between epidemics of the macroeconomic and micro-economic varieties, and between these and the syndrome of endemic failure, associated with pervasive government involvement. Each type has its characteristic warning signs - the availability of the relevant indicators is discussed in some detail - and a comprehensive prevention policy must take account of each.

Thus, for example, it is unwise to defer macroeconomic stabilisation in the hope of concealing banking sector weakness. Likewise, a rigorous application to developing and transition economies of the consensus approach to microeconomic regulation should not be deferred. Political interference is the Achilles heel of any regulatory system: among other mechanisms, it may be possible to use disclosure rules and the pressures of globalisation to increase the political attraction of regulatory enforcement.