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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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Related research

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," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 717-37, August.
  2. Allen N. Berger & Richard J. Herring & Giorgio P. Szegö, 1995. "The Role of Capital in Financial Institutions," Center for Financial Institutions Working Papers 95-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
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  11. 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.
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Citations

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Cited by:
  1. Elina Ribakova, 2005. "Liberalization, Prudential Supervision, and Capital Requirements," IMF Working Papers 05/136, International Monetary Fund.
  2. Elisabetta Montanaro, 2013. "Regole di Basilea e modelli di vigilanza: quale convergenza? (Basel rules and supervisory models: What convergence?)," Moneta e Credito, Economia civile, vol. 66(264), pages 415-442.
  3. Islam, Roumeen, 2000. "Should capital flows be regulated? - a look at the issues and policies," Policy Research Working Paper Series 2293, The World Bank.
  4. 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.
  5. Kenneth Rogoff, 1999. "International Institutions for Reducing Global Financial Instability," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 21-42, Fall.
  6. Daoud Barkat Daoud, 2003. "Quelle réglementation du capital bancaire pour les pays en développement ?," Revue d'Économie Financière, Programme National Persée, vol. 73(4), pages 311-323.
  7. Caprio, Gerard Jr. & Honohan, Patrick, 2002. "Banking policy and macroeconomic stability - an exploration," Policy Research Working Paper Series 2856, The World Bank.
  8. Marco Del Negro & Stephen Kay, 2002. "Global banks, local crises: bad news from Argentina," Economic Review, Federal Reserve Bank of Atlanta, issue Q3, pages 89-106.

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