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Economic Development Institute of the World Bank Public Disclosure Authorized 0i"n Economic Development Institute of The World Bank Public Disclosure Authorized venting Bank -C- se: aLessons-- fr-Rn R-ecn Global Public Disclosure Authorized B n0hk: FailuWres:: --: 0~ :B-- -0\ 3 Sept. 1q9q -Ger rd Cpr, Jr.- Public Disclosure Authorized Wil ja C. Hunter Dafly M.Leipziger -T-I -~D XIEVELO}PMENTD -STUIES--- - Public Disclosure Authorized Other EDI Development Studies (In orderof publication) Ente?priseRestructuringandUnemploymentinModelsofTransition Edited by Simon Commander PovertyinRussia:PublicPolicyandPnvateResponses Edited by jeni Klugman EnterpriseRestructuyingandEconomicPolicyinRussia Edited by Simon Commander, Qimiao Fan, and Mark E. Schaffer InfrastructureDelivery:PrivateInitiativeandthePublicGood Edited by Ashoka Mody Trade,Technology,andInternationalCompetitiveness Irfan ul Haque CorporateGovernance in TransitionalEconomies: InsiderControlandtheRole ofBanks Edited by Masahiko Aoki and Hyung-Ki Kim Unemployment,Restructunng,andtheLaborMarket in EasternEuropeandRussia Edited by Simon Commander and Fabrizio Coricelli MonitoringandEvaluatingSocialProgramsinDevelopingCountries: A HandbookforPolicymakers,Managers,andResearchers Joseph Valadez and Michael Bamberger AgroindustrialInvestmentandOperations James G. Brown with Deloitte & Touche LaborMdarketsin an EraofAdjustment Edited by Susan Horton, Ravi Kanbur, and Dipak Mazumdar Vol. 1-IssuesPapers; Vol. 2-CaseStudies DoesPrivatizationDeliver?Highlightsfrom a WorldBankConference Edited by Ahmed Galal and Mary Shirley 7heAdaptiveEconomy:AdjustmentPolicies inSmall,Low-IncomeCountries TonyKillick FinancialRegulation:Changing theRules ofthe Game Edited by Dimitri Vittas PublicEnterpriseReform:7heLessonsofExperience Mary Shirley andJohn Nel is (Also available in French and Spanish) PrivatizationandControlofState-OwnedEnterprises Edited by Ravi Ramamurti and Raymond Vernon FinanceattheFrontier.Debt CapacityandtheRoleofCredit in thePrivateEconomy J. D. Von Pischke EDI DEVELOPMENT STUDIES Preventing Bank Crises LessonsfromRecent Global Bank Failures Proceedingsof a conferenceco-sponsored by the Federal Reserve Bank of Chicago and the Economic Development Institute of the World Bank Edited by Gerard Caprio, Jr. William C. Hunter George G. Kaufman Danny M. Leipziger TheWorldBank Washington,D. C. Copyright 01998 The International Bank for Reconstruction and Development / THE WORLD BANK 1818 HStreet,N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing September 1998 The Economic Development Institute (EDI) was established by the World Bank in 1955 to train officials concerned with development planning, policymaking, investment analysis, and project implementation in member developing countries. At present the substance of the ED1's work emphasizes macroeconomic and sectoral economic policy analysis. Through a variety of courses, seminars, and workshops, most of which are given overseas in cooperation with local institutions, the EDI seeks to sharpen analytical skills used in policy analysis and to broaden understanding of the experience of individual countries with economic development. Although the EDI's publications are designed to support its training activities, many are of interest to a much broader audience. EDI materials, including any findings, interpretations, and conclusions, are entirely those of the authors and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the Office of the Publisher at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted through the Copyright Clearance Center Inc., Suite 910, 222 Rosewood Drive, Danvers, Massachusetts 01923, U. S. A. The backlist of publications by the World Bank is shown in the annual Index ofPublications, which is available from the Office of the Publisher. Library of Congress Cataloging-in-Publication Data Preventing bank crises: lessons from recent global bank failures proceedings of a conference sponsored by the Federal Reserve Bank of Chicago and the Economic Development Institute of the World Bank / edited by Gerard Caprino,Jr.... [et al.]. p. cm.-(EDI development studies, ISSN 1020-105) Includes bibliographical references and index. ISBN 0-8213-4202-9 1. Bank failures-Congresses. 2. Bank failures-Case studies -Congresses. I. Caprio, Gerard. II. Federal Reserve Bank of Chicago. III. Economic Development Institute (Washington, D.C.) IV.Series. HG1521.P74 1998 332.1-dc21 98-5911 CIP Contents Abbreviations and Acronyms vi Foreword vii Acknowlecdgments viii Introducticn ix PART I. AVOIDING BANKING CRISES 1. Preventing Banking Crises 3 Jeffrey A. Frankel 2. Regulat:ory Efforts to Prevent Banking Crises 13 Michael H. Moskow 3. The Role of the International Monetary Fund 27 Karin Lissakers PART II. BANK FAILURES IN LATIN AMERICAN COUNTRIES 4. The Argentine Banking Crisis: Observations and Lessons 35 Danny PM.Leipziger 5. Lessons Learned from the Chilean Experience 43 Jorge Marshall 6. Lessons from Recent Global Bank Failures: The Case of Brazil 53 Paul L. Bydalek iii iv Contients PART III. BANK FAILURES IN TRANSITION ECONOMIES 7. Restructuring Distressed Banks in Transition Economies: Lessons from Central Europe and Ukraine 69 Michael Borish and Fernando Montes-Negret 8. Preventing Banking Crises by Supporting the Truth 127 Ivan Remsik PART IV BANK FAILURES IN INDUSTRIAL COUNTRIES 9. Lessons from Bank Failures in the United States 133 James R. Barth and Robert E. Litan 10. The Banking Crisis in Japan 173 Thomas F. Cargill, Michael M. Hutchison, and TakatoshiIto 11. Bank Failures in Scandinavia 195 Sigbjorn Atle Berg 12. Banking Disasters: Causes and Preventative Measures, Lessons Derived from the U.S. Experience 209 Richard J. Herring 13. The Case for International Banking Standards 237 Morris Goldstein PART V COMMONALITIES, MISTAKES, AND LESSONS 14. Global Banking Crises: Commonalities, Mistakes, and Lessons 249 Douglas D. Evanoff 15. Deposit Insurance 255 Gillian G. Holway Garcia 16. Understanding and Preventing Bank Crises 269 Edward J. Kane 17. Banking Crises in Perspective: Two Causes and One Cure 279 Geoffrey P. Miller 18. Bank Crises: Commonalities, Mistakes, and Lessons Viewed from a South Asian Standpoint 287 John Williamson Contents v PART VI. PREVENTING FUTURE BANKING CRISES: WHAT CAN AND SHOULD BE DONE? 19. Suggestions for Improvements 295 Joseph Bisignano 20. Building a Better and Safer Banking System in Latini America and the Caribbean 303 E. Gerald Corrigan 21. Bank Restructuring Revisited 325 Andrew, Sheng 22. What C'an and Should Be Done to Prevent Future Financial Crises? 333 Edwin M. Truman PART VII. CONFERENCE OVERVIEW 23. Summary 341 George C. Kaufman 24. Concluding Thoughts 345 Gerard Caprio,Jr. Contributo:rs 349 Conference Agenda 361 Conference Participants 365 Index 371 Abbreviations and Acronyms BIS Bank for International Settlements BNA Banco de la Naci6n de Argentina CCPC Cooperative Credit Purchasing Company Japan) CEE Central and Eastern Europe CMEA Council for Mutual Economic Assistance DIC Deposit Insurance Corporation (Japan) DIS Deposit insurance system EU European Union FDICIA Federal Deposit Insurance Corporation Improvement Act FSA Financial Supervisory Agency Japan) FSU Former Soviet Union G-7 Group of Seven G-10 Group of Ten GDP Gross domestic product IMF International Monetary Fund S&L Savings and loan institution SOCB State-owned commercial bank SOE State-owned enterprise vi Foreword The papers in this volume were prepared for the conference "Preventing Bank Crises: Lessons from Recent Global Bank Failures," held in Chicago in June 1997. The conference was organized jointly by the Federal Reserve Bank of Chicago and the Economic Development Institute of the World Bank. Among the 120 participants from 36 countries were senior govern- ment officials from central banks and finance ministries, heads of bank supervision bodies, regulators, bank executives, academics, representatives of the financial press, and experts from the World Bank and the Interna- tional Monetary Fund. During the past 15 years, bank failures and insolvencies have emerged all over the globe, both in industrial and in developing countries. East Asian economies currently dominate the news as their financial sectors demon- strate severe weaknesses, and the International Monetary Fund, the World Bank, and governments intervene to provide financial support. Not only have the crises been widespread, but their costs have been extremely high, thereby creating an urgent need to encourage governments and bank regu- lators to establish and strictly enforce oversight measures and not to delay in redressing banking sector weaknesses. The conference exposed participants to the underlying causes of bank failures as well as to the approaches for dealing with them effectively. This volume focuses on lessons learned internationally and on ways to avoid major banking crises. It therefore addresses one of the key issues currently facing international financial markets and sheds additional light on the topic. Vinod Thomas, Director Economic Development Institute vii Acknowledgments This volume was
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