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.