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Beyond capital ideals : restoring banking stability

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Author Info

  • Caprio, Gerard, Jr.
  • Honohan, Patrick

Abstract

The authors examine why emerging markets, in particular, are susceptible to and affected by financial difficulties. They show that these difficulties have a richer, more complex structure than they are sometimes believed to have - with marked information asymmetries and substantial volatility. The sources of heightened regulatory failure in emerging markets in recent years include the volatility of real and nominal shocks, the difficulty of operating in uncharted territory after financial liberalization and other changes in regime, and the political pressures that can inhibit the enforcement of prudential regulation. The authors discuss what stronger regulation can and cannot accomplish, as well as options to improve the incentive structure for bankers, regulators, and other market participants. They probe the shortcomings of a regulatory paradigm that relies mainly on supervised capital adequacy and discuss the possible intermittent application of supplementary"blunt instruments"as an interim solution while longer-term reforms are being put in place. Certain well-worn messages remain valid, but are respected more in theory than in practice. There would be fewer problems, the authors say, if there were: 1) more diversification; 2) more balanced financial structures (for example, as between debt and equity); 3) more foreign banks in emerging markets'financial systems; and 4) better enforcement of both contracts and regulations. Participants in the financial sector will constantly try to get around rules that limit their profitability, so regulation must be seen as an evolutionary struggle. Prevention of financial failure is not costless, and a heavy repressive hand is not warranted. But a richer regulatory palette can be used to protect financial systems more successfully against crisis while preserving the systems'growth-enhancing effectiveness.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2235.

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Date of creation: 30 Nov 1999
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Handle: RePEc:wbk:wbrwps:2235

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

References

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  1. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  2. Berger, Allen N. & Herring, Richard J. & Szego, Giorgio P., 1995. "The role of capital in financial institutions," Journal of Banking & Finance, Elsevier, Elsevier, vol. 19(3-4), pages 393-430, June.
  3. Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 13(4), pages 85-104, Fall.
  4. 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.
  5. Bhattacharya, S. & Boot, A.W.A. & Thakor, A.V., 1995. "The Economics of Bank Regulation," Papers, Centro de Estudios Monetarios Y Financieros- 9516, Centro de Estudios Monetarios Y Financieros-.
  6. Berger, Allen N & Davies, Sally M & Flannery, Mark J, 2000. "Comparing Market and Supervisory Assessments of Bank Performance: Who Knows What When?," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 32(3), pages 641-67, August.
  7. María Soledad Martínez & Sergio Schmukler, 1999. "Do Depositors Punish Banks For "Bad" Behavior?: Examining Market Discipline In Argentina, Chile, And Mexico," Working Papers Central Bank of Chile, Central Bank of Chile 48, Central Bank of Chile.
  8. Ricardo Hausmann & Michael Gavin, 1996. "Securing Stability and Growth in a Shock Prone Region: The Policy Challenge for Latin America," IDB Publications 5919, Inter-American Development Bank.
  9. Jason Furman & Joseph E. Stiglitz, 1998. "Economic Crises: Evidence and Insights from East Asia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 1-136.
  10. Enrica Detragiache & Asli Demirgüç-Kunt, 1998. "Financial Liberalization and Financial Fragility," IMF Working Papers 98/83, International Monetary Fund.
  11. Sebastian Edwards, 1998. "Capital Inflows into Latin America: A Stop-Go Story?," NBER Working Papers 6441, National Bureau of Economic Research, Inc.
  12. anonymous, 1998. "Financial intermediation and growth," Economics Update, Federal Reserve Bank of Atlanta, Federal Reserve Bank of Atlanta, issue Jan, pages 4.
  13. repec:fth:wobaco:1083 is not listed on IDEAS
  14. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
  15. Claessens, S. & Djankov, S. & Lang, L.H.P., 1999. "East Asian Corporations. Heroes or Villains?," World Bank - Discussion Papers, World Bank 409, World Bank.
  16. Andrei Shleifer & Robert W. Vishny, 1991. "Asset Sales and Debt Capacity," NBER Working Papers 3618, National Bureau of Economic Research, Inc.
  17. Martinez Peria, Maria Soledad & Schmukler, Sergio L., 1999. "Do depositors punish banks for"bad"behavior? : market discipline in Argentina, Chile, and Mexico," Policy Research Working Paper Series 2058, The World Bank.
  18. Patrick Honohan, 1997. "Banking system failures in developing and transition countries: Diagnosis and predictions," BIS Working Papers 39, Bank for International Settlements.
  19. Robert DeYoung & Mark J. Flannery & William W. Lang & Sorin M. Sorescu, 1998. "The informational advantage of specialized monitors: the case of bank examiners," Working Paper Series, Federal Reserve Bank of Chicago WP-98-4, Federal Reserve Bank of Chicago.
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  21. Kane, Edward J., 1995. "Three paradigms for the role of capitalization requirements in insured financial institutions," Journal of Banking & Finance, Elsevier, Elsevier, vol. 19(3-4), pages 431-459, June.
  22. 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.
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Citations

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Cited by:
  1. Elisabetta Montanaro, 2013. "Regole di Basilea e modelli di vigilanza: quale convergenza? (Basel rules and supervisory models: What convergence?)," Moneta e Credito, Economia civile, Economia civile, vol. 66(264), pages 415-442.
  2. Caprio, Gerard Jr. & Honohan, Patrick, 2002. "Banking policy and macroeconomic stability - an exploration," Policy Research Working Paper Series 2856, The World Bank.
  3. Daoud Barkat Daoud, 2003. "Quelle réglementation du capital bancaire pour les pays en développement ?," Revue d'Économie Financière, Programme National Persée, Programme National Persée, vol. 73(4), pages 311-323.
  4. Kenneth Rogoff, 1999. "International Institutions for Reducing Global Financial Instability," NBER Working Papers 7265, National Bureau of Economic Research, Inc.
  5. Islam, Roumeen, 2000. "Should capital flows be regulated? - a look at the issues and policies," Policy Research Working Paper Series 2293, The World Bank.
  6. Marco Del Negro & Stephen Kay, 2002. "Global banks, local crises: bad news from Argentina," Economic Review, Federal Reserve Bank of Atlanta, Federal Reserve Bank of Atlanta, issue Q3, pages 89-106.
  7. Elina Ribakova, 2005. "Liberalization, Prudential Supervision, and Capital Requirements," IMF Working Papers 05/136, International Monetary Fund.
  8. Nabi, Mahmoud Sami & Ben Aissa, Safouane & Drine, Imed, 2008. "Ouverture financière et rattrapage technologique : Evidence empirique à partir du bassin méditerranéen
    [Financial Openness and Technological Catch-up: Empirical Evidence from the Mediterranean
    ," MPRA Paper 20637, University Library of Munich, Germany, revised Jul 2009.

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