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The Baltics - Banking crises observed

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  • Fleming, Alex
  • Lily Chu
  • Bakker, Marie-Renee
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    Abstract

    The authors compare the banking crises experienced in Estonia, Latvia, and Lithuania, examining the causes, effects, and policy responses. Estonia and Lithuania reconstituted the specialized Soviet banks as national state banks and began to privatize them. Latvia, by contrast, reconstituted the savings bank, then privatized branches of the remaining banks. In the early stages the three private banking systems were similar and grew rapidly. All three have had liberal policies toward licensing new commercial banks, believing that more banks would generate the competition needed to drive down deposit and lending rates, and provide the capital needed to support the emerging private sector. Little though was given at first to the implications of this policy for banking safety and supervision. The following conclusions, drawn by the authors, may have implications for banking reform in other former Soviet republics, especially the smaller ones: 1) some banking distress is inevitable; 2) banking distress may be desirable; 3) banking crises die down relatively quickly; 4) when crises arise, authorities should respond firmly and promptly; 5) corruption and weakness should never be rewarded; 6) banking crises should be prepared for; and 7) supervisors should send strong signals to bankers about appropriate banking behavior.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1647.

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    Date of creation: 30 Sep 1996
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    Handle: RePEc:wbk:wbrwps:1647

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    Related research

    Keywords: Banks&Banking Reform; Payment Systems&Infrastructure; Financial Crisis Management&Restructuring; Financial Intermediation; Banking Law; Banking Law; Municipal Financial Management; Banks&Banking Reform; Financial Crisis Management&Restructuring; Financial Intermediation;

    References

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    1. Stijn Claessens, 1998. "Banking reform in transition countries," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 2(2), pages 115-133.
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    Cited by:
    1. Korhonen, Iikka, 1999. "Currency Boards in the Baltic Countries: What Have We Learned?," BOFIT Discussion Papers 6/1999, Bank of Finland, Institute for Economies in Transition.
    2. Broadman, Harry G. & Recanatini, Francesca, 2000. "Seeds of corruption - Do market institutions matter?," Policy Research Working Paper Series 2368, The World Bank.
    3. Heidhues, Franz & Davis, Junior R & Schrieder, Gertrud, 1998. "Agricultural Transformation and Implications for Designing Rural Financial Policies in Romania," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 25(3), pages 351-72.
    4. David A Grigorian & Vlad Manole, 2006. "Determinants of Commercial Bank Performance in Transition: An Application of Data Envelopment Analysis," Comparative Economic Studies, Palgrave Macmillan, vol. 48(3), pages 497-522, September.
    5. Raphael H. Solomon, 2005. "Pocket Banks and Out-of-Pocket Losses: Links between Corruption and Contagion," Working Papers 05-23, Bank of Canada.
    6. Lucio Vinhas de Souza, 2004. "Financial Liberalization and Business Cycles:The Experience of Future EU Member States in the Baltics and Central Eastern Europe," Money Macro and Finance (MMF) Research Group Conference 2004 5, Money Macro and Finance Research Group.
    7. Daniela Klingbiel & Luc Laeven, 2002. "Managing the Real and Fiscal Effects of Banking Crises," World Bank Publications, The World Bank, number 14057.
    8. Niinimäki, Juha-Pekka, 2002. "Bank panics in transition economies," BOFIT Discussion Papers 2/2002, Bank of Finland, Institute for Economies in Transition.

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