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Banking on crises : expensive lessons from recent financial crises

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  • 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
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Handle: RePEc:wbk:wbrwps:1979

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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. McKinnon, Ronald I. & Pill, Huw, 1998. "International Overborrowing: A Decomposition of Credit and Currency Risks," World Development, Elsevier, Elsevier, vol. 26(7), pages 1267-1282, July.
  2. Ross Levine & Norman Loayza & Thorsten Beck, 2002. "Financial Intermediation and Growth: Causality and Causes," Central Banking, Analysis, and Economic Policies Book Series, Central Bank of Chile, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (S (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 2, pages 031-084 Central Bank of Chile.
  3. Ben S. Bernanke, 1983. "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression," NBER Working Papers 1054, National Bureau of Economic Research, Inc.
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  5. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 544, Board of Governors of the Federal Reserve System (U.S.).
  6. Joe Peek & Eric S. Rosengren, 1997. "Collateral damage: effects of the Japanese real estate collapse on credit availability and real activity in the United States," Working Papers, Federal Reserve Bank of Boston 97-5, Federal Reserve Bank of Boston.
  7. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, American Economic Association, vol. 80(5), pages 1183-1200, December.
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  10. Demirguc-Kunt, Asli & Detragiache, Enrica, 1997. "The determinants of banking crises : evidence from industrial and developing countries," Policy Research Working Paper Series 1828, The World Bank.
  11. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1998. "Prospective Deficits and the Asian Currency Crisis," NBER Working Papers 6758, National Bureau of Economic Research, Inc.
  12. Reuven Glick & Andrew K. Rose, 1998. "Contagion and trade: why are currency crises regional?," Pacific Basin Working Paper Series, Federal Reserve Bank of San Francisco 98-03, Federal Reserve Bank of San Francisco.
  13. Howard Lee & Liliana Rojas-Suárez & Steven Riess Weisbrod, 1992. "Bank Risk and the Declining Franchise Value of the Banking Systems in the United States and Japan," IMF Working Papers 92/45, International Monetary Fund.
  14. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," NBER Working Papers 5661, National Bureau of Economic Research, Inc.
  15. Caprio Jr., Gerard, 1997. "Safe and sound banking in developing countries : we're not in Kansas anymore," Policy Research Working Paper Series 1739, The World Bank.
  16. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
  17. Morris Goldstein, 1998. "The Asian Financial Crisis," Policy Briefs PB98-1, Peterson Institute for International Economics.
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Citations

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

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