IDEAS home Printed from
   My bibliography  Save this paper

Financial history : lessons of the past for reformers of the present


  • Caprio Jr., Gerard
  • Vittas, Dimitri


Among the lessons financial history offers: Macroeconomic stability - low inflation and sound public finance - is important for creating the right incentives for banks and for facilitating the development of securities markets. High inflation and large fiscal deficits distort economic behavior in favor of short-term speculative projects conducive to sustainable economic development. Central bank independence may contribute to economic stability. One way to increase it is by lengthening the term of central bank governors. There must be incentives for bank owners to behave prudently - a requirement that they have capital commensurate with the risks they assume, for example. Unlimited liability and double liability limits may be less feasible now than in the past, but banks in developing countries that face higher risks should maintain higher capital ratios than banks in the more advanced OECD countries. Effective supervision is also essential. Banks run into solvency problems because they fail to diversify - often because of regulatory (especially geographic) restrictions, but also because of excessive connected lending or genuine mistakes. Regulators must ensure that banks diversify their risks, which means ending geographic or sectoral restrictions (including prohibitions against holding foreign assets) and restricting connected lending. Developing effective supervision (to ensure meaningful and effective compliance with prudential rules) is difficult and time-consuming but essential. The difficulty of supervising universal banks and financial conglomerates is an argument used against them in developing countries. But universal banks may generate efficiency gains as they overcome the problems of inadequate reliable public information on industrial and commercial companies. Holding small equity stakes and being involved in corporate governance may be productive. The risk of overlending to related firms is likely to be small when banks hold small stakes in industrial firms; it is high when firms control banks. Pension funds and other institutional investors have grown in importance in many countries over the past thirty years or so, because of longer life spans and longer retirement. These funds started as labor market institutions and personnel management tools, but have become important financial intermediaries. Pension funds offer developing countries an alternative both for restructuring their public finances and for promoting their capital markets. Pension funds can play the role that thrift deposit institutions - such as savings banks, credit cooperatives, and building societies - played in developed countries in the nineteenth century. But thrift institutions can still contribute to financial and economic development by promoting thrift and facilitating credit rural areas and among low-income groups. They will contribute more if they involve a three tier structure that combines the benefits of local involvement and monitoring with centralized auditing and supervision.

Suggested Citation

  • Caprio Jr., Gerard & Vittas, Dimitri, 1995. "Financial history : lessons of the past for reformers of the present," Policy Research Working Paper Series 1535, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1535

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Vittas, Dimitri & Iglesias, Augusto, 1992. "The rationale and performance of personal pension plans in Chile," Policy Research Working Paper Series 867, The World Bank.
    2. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Honohan, Patrick*Vittas, Dimitri, 1996. "Bank regulation and the network paradigm : policy implications for developing and transition economies," Policy Research Working Paper Series 1631, The World Bank.
    2. Lyonnet, Victor & Werner, Richard, 2012. "Lessons from the Bank of England on ‘quantitative easing’ and other ‘unconventional’ monetary policies," International Review of Financial Analysis, Elsevier, vol. 25(C), pages 94-105.
    3. Iftekhar Hasan & Loretta J Mester, 2008. "Central Bank Institutional Structure and Effective Central Banking: Cross-Country Empirical Evidence," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 50(4), pages 620-645, December.


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1535. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.