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Banking on crises : expensive lessons from recent financial crises

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  • Caprio Jr., Gerard

Abstract

Caprio summarizes both basic and proximate factors behind financial crises, arguing that although a variety of factors contribute to the crises, the basic causes are information and incentive problems. Caprio develops a scoring system for the broad regulatory environment for a dozen Asian and Latin American financial systems in 1997. The Asian economies in crises score the lowest. Economies with the highest scores felt relatively little impact from the crises. This paper will address these issues. Section II will summarize briefly the voluminous literature on proximate and more distant causes of crises. Although both micro and macro factors are associated with crises, beyond lobbying for changes in the international financial system, national authorities are left with following sound macro policies, improving financial sector infrastructure, and upgrading regulation and supervision as mean of minimizing the likelihood and costs of financial crises. Is there a payoff to improving the regulatory framework? Tentative evidence presented in section III, which compares the broad regulatory environment in 12 selected Asian and Latin American countries, suggests that the answer is affirmative. This comparison both reveals how some countries have been progressing, and can help as a guide, indicating weak areas of regulation that should be a target for further improvement. Generally, those countries that have higher scores on their regulatory systemsappear to have weathered the latest crisis well, suggesting that improving the regulatory environment, broadly interpreted, should be a goal for countries that have not thus far made much headway in this area. A plausible hypothesis then is that authorities are learning -- at great cost - - from the last 2 decades of crises and are moving to raise the cost or otherwise tighten the safety net supporting the banking sector. Section IV concludes with unresolved issues and suggestions for future research.

Suggested Citation

  • Caprio Jr., Gerard, 1998. "Banking on crises : expensive lessons from recent financial crises," Policy Research Working Paper Series 1979, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1979
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Knutsen, Sverre & Sjögren, Hans, 2009. "Institutional Clash and Financial Fragility. An Evolutionary Model of Banking Crises," MPRA Paper 13133, University Library of Munich, Germany.
    2. George G. Kaufman, 2000. "Banking and currency crisis and systemic risk: lessons from recent events," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 9-28.
    3. Carlos Acevedo, 2000. "Mecanismos de transmisión de política monetaria con liberalización financiera: El Salvador en los noventa," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(4), pages 361-412, octubre-d.
    4. Ismael E Arciniegas Rueda & Fabio Arciniegas, 2005. "SOM-based Data Analysis of Speculative Attacks' Real Effects," International Finance 0507001, EconWPA.
    5. Lipsey Robert E. & Ramstetter Eric D. & Blomström Mangus & Eckes Alfred E. & Fifield S.G.M. & Power D. M. & Sinclair C. D. & Jaiswal-Dale Ameeta & Power Sally J. & Abderrezak Ali, 2000. "Global Economy Quarterly, Issue 4," Global Economy Journal, De Gruyter, vol. 1(4), pages 1-109, December.
    6. Clara Garcia, 2004. "Capital Inflows, Policy Responses, and Their Ill Consequences: Thailand, Malaysia, and Indonesia in the Decade Before the Crises," Working Papers wp81, Political Economy Research Institute, University of Massachusetts at Amherst.
    7. Rupert D Worrell, 2004. "Quantitative Assessment of the Financial Sector; An Integrated Approach," IMF Working Papers 04/153, International Monetary Fund.
    8. Dilip K. DAS, 2000. "Asian Crisis: Distilling Critical Lessons," UNCTAD Discussion Papers 152, United Nations Conference on Trade and Development.
    9. Schargrodsky, Ernesto & Sturzenegger, Federico, 2000. "Banking regulation and competition with product differentiation," Journal of Development Economics, Elsevier, vol. 63(1), pages 85-111, October.

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