The Causes and Management of Banking Crises

Central banks are concerned for the stability of the banking sector, but the world seems to be continually beset by banking crises. The structural evolution of the banking sector may have a significant bearing on questions of solvency and stability. Banking systems have developed in different ways among countries, for a variety of reasons, but the trend has been towards an increasingly liberal stance by the authorities as regards allowing banks to diversify their activities. This should be welcomed, but only on two conditions: first, that the management of individual banks is sufficiently capable; and secondly that every bank can be effectively supervised by the central bank (or other responsible regulatory body). Access by foreign banks to a particular country is usually beneficial in terms of competition and efficiency. The causes of banking crises can be categorised under several headings: macroeconomic instability; deficient supervision; poor strategies; weak management; inadequate control systems; operational failures; fraud. The experience of a number of countries is reviewed. Whatever the causes, the authorities need a coherent strategy for addressing such crises. Various aspects of crisis management are discussed, and recommendations made. This handbook is also available in Russian and Spanish.