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Capital movements, asset values, and banking policy in globalized markets

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  • Edward J. Kane

Abstract

Weaknesses in banking systems are rooted in government credit-allocation preferences that prove unsupportable in private markets. Losses that preferential loans impose on lending banks and on the governmental safety net can be covered up for awhile, but not indefinitely. A silent run begins when sophisticated depositors recognize that assets in the country's combined banking and deposit-insurance system cannot cover the claims of bank depositors without being supplemented by substantial injections of funds from domestic or foreign taxpayers. Longstanding banking-system weakness devolves into a countrywide economic crisis when and as doubts about the government's willingness to force taxpayers to support an economically insolvent banking system are spread by an escalating silent run.' Financial crises become more frequent, but also shallower when foreign-bank presence and activities are expanded. Offshore banks put the supervisory systems and safety-net guarantees of their homelands into competition with those of host countries. Intensified offshore banking competition provides substitutes for deposits in local banks. These substitutes make it easier for host-country depositors to test the local guarantee system by quietly fleeing to quality. In effect, banking crises discipline inefficient and unfair regulatory systems and push the social burdens created by weak supervisory systems toward the levels found in best-practices countries.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Chicago in its series Proceedings with number 606.

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Length: 482-501
Date of creation: 1998
Date of revision:
Publication status: Published in Conference on Bank Structure and Competition (1998 : 34th) ; Payments systems in the global economy : risks and opportunitie.
Handle: RePEc:fip:fedhpr:606

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Keywords: Bank capital ; Bank competition ; Bank assets;

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References

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  1. Michael P. Dooley, 1997. "A Model of Crises in Emerging Markets," NBER Working Papers 6300, National Bureau of Economic Research, Inc.
  2. Claessens, Stijn & Demirguc-Kunt, Asli & Huizinga, Harry, 1998. "How does foreign entry affect the domestic banking market?," Policy Research Working Paper Series 1918, The World Bank.
  3. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  4. Claessens, Stijn & Demirguc-Kunt, Asl[iota] & Huizinga, Harry, 2001. "How does foreign entry affect domestic banking markets?," Journal of Banking & Finance, Elsevier, vol. 25(5), pages 891-911, May.
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Cited by:
  1. Maria Concetta Chiuri & Giovanni Ferri & Giovanni Majnoni, 2000. "The Macroeconomic Impact Of Bank Capital Requirements In Emerging Economies: Past Evidence To Assess The Future," series 0002, Dipartimento di Scienze Economiche e Metodi Matematici - Università di Bari, revised Sep 2000.
  2. Eduardo Levy & Federico Sturzenegger, 2000. "Is EMU a Blueprint for Mercosur?," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 37(110), pages 63-99.
  3. Edward J. Kane, 2008. "Regulation and Supervision: An Ethical Perspective," NBER Working Papers 13895, National Bureau of Economic Research, Inc.
  4. Charles Calomiris & Joseph R. Mason, 2003. "How to Restructure Failed Banking Systems: Lessons from the U.S. in the 1930's and Japan in the 1990's," NBER Working Papers 9624, National Bureau of Economic Research, Inc.
  5. Nils H. Hakansson, 1999. "The Role of a Corporate Bond Market in an Economy - and in Avoiding Crises," Research Program in Finance Working Papers RPF-287, University of California at Berkeley.
  6. Hakansson, Nils H., 1999. "The Role of a Corporate Bond Market in an Economy -- and in Avoiding Crises," Research Program in Finance, Working Paper Series qt6sq4c6g0, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley.
  7. Edward J. Kane, 2000. "Capital Movements, Banking Insolvency, and Silent Runs in the Asian Financial Crisis," NBER Working Papers 7514, National Bureau of Economic Research, Inc.
  8. Kane, Edward J., 2000. "The dialectical role of information and disinformation in regulation-induced banking crises," Pacific-Basin Finance Journal, Elsevier, vol. 8(3-4), pages 285-308, July.

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