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Capital Movements, Asset Values, and Banking Policy in Globalized Markets

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  • Edward J. Kane

Abstract

Weaknesses in banking systems are rooted in government credit-allocation preferences that prove unsupportable in private markets. Losses that preferential loans impose on lending banks and on the governmental safety net can be covered up for awhile, but not indefinitely. A silent run begins when sophisticated depositors recognize that assets in the country's combined banking and deposit-insurance system cannot cover the claims of bank depositors without being supplemented by substantial injections of funds from domestic or foreign taxpayers. Longstanding banking-system weakness devolves into a countrywide economic crisis when and as doubts about the government's willingness to force taxpayers to support an economically insolvent banking system are spread by an escalating silent run.' Financial crises become more frequent, but also shallower when foreign-bank presence and activities are expanded. Offshore banks put the supervisory systems and safety-net guarantees of their homelands into competition with those of host countries. Intensified offshore banking competition provides substitutes for deposits in local banks. These substitutes make it easier for host-country depositors to test the local guarantee system by quietly fleeing to quality. In effect, banking crises discipline inefficient and unfair regulatory systems and push the social burdens created by weak supervisory systems toward the levels found in best-practices countries.

Suggested Citation

  • Edward J. Kane, 1998. "Capital Movements, Asset Values, and Banking Policy in Globalized Markets," NBER Working Papers 6633, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:6633 Note: CF
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    References listed on IDEAS

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    1. Michael P. Dooley, 1998. "A model of crises in emerging markets," International Finance Discussion Papers 630, Board of Governors of the Federal Reserve System (U.S.).
    2. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-325, August.
    3. Claessens, Stijn & Demirguc-Kunt, Asli & Huizinga, Harry, 1998. "How does foreign entry affect the domestic banking market?," Policy Research Working Paper Series 1918, The World Bank.
    4. Dooley, Michael P, 2000. "A Model of Crises in Emerging Markets," Economic Journal, Royal Economic Society, vol. 110(460), pages 256-272, January.
    5. Claessens, Stijn & Demirguc-Kunt, Asl[iota] & Huizinga, Harry, 2001. "How does foreign entry affect domestic banking markets?," Journal of Banking & Finance, Elsevier, vol. 25(5), pages 891-911, May.
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    Citations

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    Cited by:

    1. Edward J. Kane, 2008. "Regulation and Supervision: An Ethical Perspective," NBER Working Papers 13895, National Bureau of Economic Research, Inc.
    2. Concetta Chiuri, Maria & Ferri, Giovanni & Majnoni, Giovanni, 2002. "The macroeconomic impact of bank capital requirements in emerging economies: Past evidence to assess the future," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 881-904, May.
    3. Kane, Edward J., 2000. "Capital movements, banking insolvency, and silent runs in the Asian financial crisis," Pacific-Basin Finance Journal, Elsevier, pages 153-175.
    4. Martin D.D. Evans & Richard K. Lyons, 2017. "Order Flow and Exchange Rate Dynamics," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 6, pages 247-290 World Scientific Publishing Co. Pte. Ltd..
    5. Kane, Edward J., 2000. "Capital movements, banking insolvency, and silent runs in the Asian financial crisis," Pacific-Basin Finance Journal, Elsevier, pages 153-175.
    6. Hakansson, Nils H., 1999. "The Role of a Corporate Bond Market in an Economy -- and in Avoiding Crises," Research Program in Finance, Working Paper Series qt6sq4c6g0, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley.
    7. repec:wsi:ijitdm:v:04:y:2005:i:03:n:s0219622005001684 is not listed on IDEAS
    8. Charles Calomiris & Joseph R. Mason, 2003. "How to Restructure Failed Banking Systems: Lessons from the U.S. in the 1930's and Japan in the 1990's," NBER Working Papers 9624, National Bureau of Economic Research, Inc.
    9. Kane, Edward J., 2000. "The dialectical role of information and disinformation in regulation-induced banking crises," Pacific-Basin Finance Journal, Elsevier, pages 285-308.
    10. Eduardo Levy & Federico Sturzenegger, 2000. "Is EMU a Blueprint for Mercosur?," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 37(110), pages 63-99.

    More about this item

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • K2 - Law and Economics - - Regulation and Business Law

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