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Banking on crises : expensive lessons from recent financial crises

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Author Info

  • Caprio Jr., Gerard

Abstract

Caprio summarizes both basic and proximate factors behind financial crises, arguing that although a variety of factors contribute to the crises, the basic causes are information and incentive problems. Caprio develops a scoring system for the broad regulatory environment for a dozen Asian and Latin American financial systems in 1997. The Asian economies in crises score the lowest. Economies with the highest scores felt relatively little impact from the crises. This paper will address these issues. Section II will summarize briefly the voluminous literature on proximate and more distant causes of crises. Although both micro and macro factors are associated with crises, beyond lobbying for changes in the international financial system, national authorities are left with following sound macro policies, improving financial sector infrastructure, and upgrading regulation and supervision as mean of minimizing the likelihood and costs of financial crises. Is there a payoff to improving the regulatory framework? Tentative evidence presented in section III, which compares the broad regulatory environment in 12 selected Asian and Latin American countries, suggests that the answer is affirmative. This comparison both reveals how some countries have been progressing, and can help as a guide, indicating weak areas of regulation that should be a target for further improvement. Generally, those countries that have higher scores on their regulatory systemsappear to have weathered the latest crisis well, suggesting that improving the regulatory environment, broadly interpreted, should be a goal for countries that have not thus far made much headway in this area. A plausible hypothesis then is that authorities are learning -- at great cost - - from the last 2 decades of crises and are moving to raise the cost or otherwise tighten the safety net supporting the banking sector. Section IV concludes with unresolved issues and suggestions for future research.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1979.

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Date of creation: 30 Sep 1998
Date of revision:
Handle: RePEc:wbk:wbrwps:1979

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Related research

Keywords: Financial Intermediation; Payment Systems&Infrastructure; Labor Policies; Banks&Banking Reform; Financial Crisis Management&Restructuring; Banks&Banking Reform; Financial Intermediation; Financial Crisis Management&Restructuring; Environmental Economics&Policies; Economic Theory&Research;

References

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  1. Reuven Glick & Andrew K. Rose, 1998. "Contagion and trade: why are currency crises regional?," Pacific Basin Working Paper Series 98-03, Federal Reserve Bank of San Francisco.
  2. Beck, T.H.L. & Levine, R. & Loayza, N., 2000. "Financial intermediation and growth: Causality and causes," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125519, Tilburg University.
  3. Corsetti, G. & Pesenti, P. & Roubini, N., 1998. "What Caused the Asian Currency and Financial Crisis?," Papers 343, Banca Italia - Servizio di Studi.
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Citations

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Cited by:
  1. Schargrodsky, Ernesto & Sturzenegger, Federico, 2000. "Banking regulation and competition with product differentiation," Journal of Development Economics, Elsevier, vol. 63(1), pages 85-111, October.
  2. Knutsen, Sverre & Sjögren, Hans, 2009. "Institutional Clash and Financial Fragility. An Evolutionary Model of Banking Crises," MPRA Paper 13133, University Library of Munich, Germany.
  3. Dilip K. DAS, 2000. "Asian Crisis: Distilling Critical Lessons," UNCTAD Discussion Papers 152, United Nations Conference on Trade and Development.
  4. Clara Garcia, 2004. "Capital Inflows, Policy Responses, and Their Ill Consequences: Thailand, Malaysia, and Indonesia in the Decade Before the Crises," Working Papers wp81, Political Economy Research Institute, University of Massachusetts at Amherst.
  5. Ismael E Arciniegas Rueda & Fabio Arciniegas, 2005. "SOM-based Data Analysis of Speculative Attacks' Real Effects," International Finance 0507001, EconWPA.
  6. DeLisle Worrell, 2004. "Quantitative Assessment of the Financial Sector," IMF Working Papers 04/153, International Monetary Fund.
  7. George G. Kaufman, 2000. "Banking and currency crisis and systemic risk: lessons from recent events," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 9-28.

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