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Capital Movements, Asset Values, and Banking Policy in Globalized Markets

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  • Edward J. Kane
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    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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6633.

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    Date of creation: Jul 1998
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    Handle: RePEc:nbr:nberwo:6633

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    1. Michael P. Dooley, 1998. "A model of crises in emerging markets," International Finance Discussion Papers 630, Board of Governors of the Federal Reserve System (U.S.).
    2. 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.
    3. 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.
    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. Edward J. Kane, 2008. "Regulation and Supervision: An Ethical Perspective," NBER Working Papers 13895, National Bureau of Economic Research, Inc.
    2. Concetta Chiuri, Maria & Ferri, Giovanni & Majnoni, Giovanni, 2002. "The macroeconomic impact of bank capital requirements in emerging economies: Past evidence to assess the future," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 881-904, May.
    3. Kane, Edward J., 2000. "Capital movements, banking insolvency, and silent runs in the Asian financial crisis," Pacific-Basin Finance Journal, Elsevier, vol. 8(2), pages 153-175, May.
    4. 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.
    5. 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.
    6. 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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