What Is An International Banking Crisis

In many industries, competition has become increasingly global over the past two decades. Banking and financial services are no exception. Rapidly falling costs of transaction due to technological innovation and the removal of capital controls, in the industrial countries in the late 1970s and early 1980s and in many developing countries thereafter, have together led to a huge increase in the volume of short-term international financial flows. Core investment and commercial banking services -...

Where Do We Go From Here

The growing threat of global crisis is fuelling a debate over the means available to contain and resolve it, as well as over the ways in which countries can protect themselves from its consequences (see Guitian, 1999). The world economy has become so closely integrated that not only do countries need to ensure that they manage their own economies well they must also be ready to anticipate, and adapt to, economic mismanagement elsewhere. The first issue that needs to be addressed is determining...

The Superfluity Of An International Lender Of Last Resort

We have argued that the risks of an international banking crisis have actually diminished over recent years. But we still need to consider the case for an international lender of last resort (LOLR) to cope with the risk of an international banking crisis. If the risk of such an internationally transmitted crisis really is as low as we judge, then no one would need to make the case for such an international LOLR. But suppose that we are wrong, and the risks of an international banking crisis in...

Trends In Corporate Governance

The competing financial systems ('Anglo-Saxon' versus 'Germanic', or 'market' versus 'bank-orientated') debate is often couched in terms of implications for corporate governance and indeed society as a whole. The debate is often somewhat confused as a result of the influence of 'financial myths' (Mishkin, 2001, Ch. 1). We have already noted that internal, rather than externally supplied, finance is the major source of investment finance for both large corporates and SMEs. We have also noted...

The Origins and Domestic Role of the Lender of Last Resort

The concept has its origins in a problem which can occur in a domestic banking system in a scramble for liquidity as follows. Suppose one bank fails. This gives rise to fears on the part of other depositors about the soundness of their own banks, and they go to get cash accordingly (in the nineteenth century in the form of gold or in Britain as Bank of England notes). But banks do not hold all funds deposited with them as cash, so all banks together cannot cope with a mass withdrawal. One bank...

The Future Of Multinational Banking

More than 160 years after the first wave of multinational banking, it is clear that the future for MNBs will not merely be an 'extension of the past' (Khambata, 1996, p. 286). Powerful forces in the global financial system are producing rapid changes in both the structure of financial markets and the role that banks play within them. Market structure is undergoing significant change driven by the processes of consolidation, conglomeration and specialization in the provision of banking and...

The Cycle of Regulation versus Innovation

There is an ongoing dilemma between the imposition of regulation and the efficiency, or completeness and profitability, of any market. Van Horne (1985) mentioned that the purpose of financial markets is to channel the savings of the society to the most profitable investment opportunities on a risk-adjusted return basis. There is a dynamic connection between market innovation and regulation. Financial innovation often occurs in response to regulation, especially when regulation makes little...

The Case For Free Banking A Freebanking System

Imagine a laissez-faire regime in a hypothetical 'imperfect' economic environment - information is scarce and asymmetric, there are non-trivial agency and coordination problems and so on.5 These problems give rise to a financial system characterized by the presence of intermediaries that enable agents to achieve superior outcomes to those they could otherwise achieve (for example, by cutting down on transactions and monitoring costs). Perhaps the most important intermediaries are banks, which...

Summary And Conclusion

In this chapter we have examined the concept of an international banking crisis and discussed whether the risks of such a crisis have been increasing. Our findings can be briefly summarized. We point out that for there to be a banking crisis proper, not only must banks face financial losses but the scale of these losses must be sufficiently great so as to threaten the integrity of the entire banking system or national payment system. An international banking crisis is where financial...

Some Other Considerations

The simple model discussed in the previous section identifies three fundamental arguments that should be taken into account when a country decides about its currency regime. There are of course additional considerations that need to be discussed. Indeed, apart from the credibility benefit and the cost of being vulnerable to foreign shocks, the literature identifies a number of other costs and benefits of a currency board in comparison to an independent central bank.9 4. Transaction costs An...

Recent Banking Crises

Given their incidence and variety over the past 15 years, banking crises (in both developing and industrial economies) are clearly not random or isolated events. Around the world, banks have had high levels of non-performing loans, there has been a major destruction of bank capital, banks have failed, and massive support operations have been necessary. The failure rate among banks has been greater than at any time since the great depression of the 1920s. In the case of Indonesia, Malaysia,...

Some Common Elements In Banking Distress

Analysis of recent financial crises in both developed and less-developed countries indicates that they are not exclusively (or even mainly) a problem of the rules being wrong (see, for instance, Brealey, 1999 Corsetti et al., 1998 and Lindgren et al., 1996). Five common characteristics have been weak internal risk analysis, management and control systems within banks inadequate official supervision weak (or even perverse) incentives within the financial system generally and financial...

Liberalization Stock Adjustment Versus Steady State

Many financial crises have been associated with changes in the regulatory regime and a process of liberalization. For decades, the economies of South East Asia were highly regulated with interest rate ceilings, limitations on lending growth by financial institutions, restrictions on foreign entry into the banking system and so on. At various times during the 1990s, these restrictions were relaxed, and the pace of financial liberalization accelerated. Williamson and Mahar (1998) show that almost...

Implications For Regulatory Structure

In considering institutional structures for financial regulation it is necessary to assess alternative models in terms of economies of scope, regulatory parity (the 'level playing field') and (in respect of prudential regulation) what might loosely be termed 'prudential logic'. Prudential logic refers in particular to the importance of aligning the remit of the regulator with the risk management function of the regulated organization, so that in the case of centralized risk management of...

Extension of Probit Model II Contagion Effect

A spate of recent financial crises, the international crisis of Mexico in 1995, the still unfolding effects of the Asian crisis and the more recent financial crisis in Russia have been accompanied by episodes of financial market contagion in which financial markets of many countries have experienced increases in volatility. Using a panel data set with annual information for 30 countries during the period from 1975 to 1996, Esquivel and Larrain (1998) find that the contagion effects in currency...

From Book Value Of Equity To Market Value Of Equity

Realization of shareholder value can begin by tracing the sources of value increments in excess of book value of equity (BVE). For universal banks, the BVE is the sum of (i) the par value of shares when originally issued (ii) the surplus paid in by investors when the shares were issued (iii) retained earnings on the books of the bank and (iv) reserves set aside for loan losses (Saunders, 1996). Depending on the prevailing regulatory and accounting system, BVE must be increased by unrealized...

Financial Liberalization

The Reregulation of Commercial Banking Commercial banks dominate the financial system in Thailand, with a 73 per cent share of both household savings and credits extended by all financial institutions. Local commercial banks and branches of foreign banks are governed by the Commercial Banking Act of 1962 together with the amendments made in 1979,1985 and 1992. The first two amendments were designed to improve and revise the 1962 Act in order to make it more efficient and suitable to changing...

General Impact Of Emu On Banking And Financial Markets

The arrival of Euroland represents a watershed in EU (and global) banking. This is not only because of EMU itself, but also because of the positioning in time of EMU and concurrent market developments. The latter 'positioning' reflects the apparently successful launch of EMU closely on the heels of another major and related regulatory initiative, the SMP. EMU has helped to consolidate EU bankers' expectations towards more sustained deregulation and intensifying competition. Contemporaneous...

Crossborder Mergers A Regulatory Challenge

Five public policy issues are raised by bank mergers in Europe. These include protection of investors, safety and soundness (systemic stability), concentration, impact on lending to small and medium-sized enterprises (SMEs), and international competitiveness of financial firms. A first potential source of public concern is investor protection in the case of the acquisition of a domestic bank (let us say a Dutch institution) by a foreign bank. A problem could arise if the Dutch component becomes...

Costs and Efficiency in Japanese Banking

Given the problems experienced by the Japanese financial system (and banks in particular) in recent years, and the recent pressures for consolidation, surprisingly little academic research has been undertaken into the costs and efficiency of Japanese banks. This contrasts markedly with the wealth of research into the performance of US financial institutions detailed previously. Tachibanaki et al. (1991) estimated a two-output translog cost function using a sample of 61 banks between 1985 and...

Conclusions And Lessons

One important lesson from the financial crisis is that, in Thailand, financial liberalization in an uncontrolled financial sector resulted in misallocation and mismatching of funds. In general, the Thai financial crisis reflected the failure of the banking sector, expressing itself partly in increasing current account problems but mainly in careless lending borrowing and the accumulation of non-performing loans. By the time the real economy started to show signs of weakening, with sluggish...

Competitive Strategies In Euroland

As Davidson et al. (1998, p. 67) note with regard to preparations for EMU Astonishingly, many banks seem ill prepared. Although they have tackled the IT and operational challenges raised by a single European currency, they have failed to address the more difficult strategic issues. Put bluntly, they have not considered how they will prosper once a single currency wipes out great chunks of profit in their traditional wholesale businesses of foreign exchange, corporate banking and government bond...

Banking With A Single Currency2

Eight impacts are identified and analysed. The first six concern capital markets, including the government bond market and its fast-growing appendix, the interest rate derivative market, the corporate bond and equity markets, institutional fund management, the euromarket, the foreign exchange market, and the competition between the euro and the US dollar as international reserve currencies. The last two effects concern commercial banking with the impact of the single currency on credit risk and...

Banking Crises Theory And History

The theory and history of banking crises developed interconnectedly and almost simultaneously. It seems probable that the reason for this was that the theory developed in the nineteenth century, and was developed largely by those who had been or still were practical bankers, or, most notably in the case of Walter Bagehot, commentators on current financial arrangements and events. Certainly until this century, only problems in the banking system were seen as financial crises. Crashes of...

Clustering bank failures tend to be clustered around a few years

Looking at failures across a number of countries, there appears to be a clustering effect in relation to bank failures. In the United States, there were serious banking problems in the 1931-39 and 1981-90 periods. In Spain, 48 banks failed between 1978 and 1983, and in Japan, banking problems have persisted through the 1990s. The presence of a herd instinct among depositors and investors would explain a run on several banks over a relatively short period, and more recently, this has been...

Bank Failure A Qualitative Review

This author has reported the details of individual bank failure cases from around the world elsewhere (Heffernan, 1996). Based on those cases, together with some failures which have occurred since, it is possible to iden tify the major features of failure. The list of causes, as it appears below, is for ease of exposition - it is rare for a bank failure to be due to one single factor. Usually, there are a number of contributing factors. For example, poor management can be the source of a weak...

An International Role

Now we come to dealing directly with the international LOLR concept. Unless the International Monetary Fund (IMF) or some other body can issue any currency it wishes on demand and without limit, it cannot act as international LOLR. Many of the advocates of this scheme come close to recognizing this, and urge that the IMF should be given more reserves to enable it to lend more freely. The trouble with that, apart from its ignoring the fundamental point that an international LOLR has not yet been...

Are the Risks of an International Banking Crisis Increasing

First, let us restate our definition. An international banking crisis is the international transmission of financial problems that, without policy intervention, would have threatened the stability of the banking system and the operation of the payments system in a number of different countries. On this definition, events that come even close to being classified as international banking crises have been extremely rare. Over the past century there has been Credit Anstalt, Herstatt, and the...

The 1997 Financial Crisis And Its Impact On Financial Reforms

There is plenty of literature on the causes and symptoms of the Asian financial crisis in general, and the experience of Thailand in particular see, for example, McKinnon and Pill (1998). Specifically, the poor supervision of commercial banks and finance companies by the BoT is widely seen as a key reason for the Thai economy's rapid collapse after the baht was floated in July 1997 (Vatikiotis, 1998 Vatikiotis and Keenan, 1999), along with the aforementioned build-up of private international...

The Determinants Of Bank Failure

The causes of bank failure can be examined using either qualitative or quantitative approaches. In this section both are employed, with a view to providing the reader with a comprehensive review of the determinants of bank failure. The section begins by reporting the results of qualitative studies of bank failure. Based on 'case studies', it is possible to identify common causes of bank failure. Having reviewed the qualitative results, the findings of econometric models used to identify the...

Summary of Qualitative and Quantitative Findings

In this subsection, the degree to which the qualitative review and quantitative studies of the causes of bank failure are compatible is discussed. The results of quantitative studies show, overwhelmingly, that profitability, defined as the ratio of net income to total assets, is one of the key determinants of bank failure. That is, as profitability rises, the probability of failure declines. Management is responsible for a bank's profit, making this finding consistent with the case study...

Moral Hazard Looting and Failures of Governance and Supervision

The scale of losses in individual institutions and the overall severity of domestic banking crises also depend upon microeconomic or structural factors. It is well understood that failing institutions may be subject to both excessive risk taking and fraud. The US savings and loan crisis (not incidentally a banking crisis under our definition, since while of substantial magnitude it did not threaten the integrity of the US banking system or payment mechanism) illustrates how the management and...

Bank Failure Quantitative Models

While a qualitative review of bank failure provides some insight into what causes a bank to fail, these ideas must be subjected to more rigorous testing. Any econometric model of bank failure must incorporate the basic point that insolvency is a discrete outcome at a certain point in time. The outcome is binary either the bank fails or it does not. The discussion in the previous section shows that banks (or, in Japan, almost the entire banking sector) are often bailed out by the state before...

Bank Failure The Controversies

Most academics, politicians (representing the taxpayer), depositors and investors accept the idea that the banking sector is different. Banks play such a critical role in the economy that they need to be singled out for more intense regulation than other sectors. The presence of asymmetric information is at the heart of the problem. Bankers, their customers, regulators and investors have different information sets on the health of a bank. Small depositors are the least likely to have...

Documentary Credits

A documentary credit, also known as a letter of credit (L C), is a written undertaking by a bank on behalf of a buyer importer to pay the seller an amount of money within a specified time provided the seller presents documents strictly in accordance with the terms laid down in the L C. It is useful to assume that the banks only handle irrevocable L Cs, since revocable L Cs are hardly used these days given that under a revocable L C the importer can amend or even cancel it without prior notice...

Internationalization Securitization And Derivatization

In the last three decades, there has been substantial liberalization of the banking sector and financial innovation. These changes have been facilitated by reregulation of banks, which continue to lie at the heart of all financial systems, and have themselves driven changes in prudential, and monetary, regulation policy. The general trend has been away from prescriptive regulation of financial activities, quantitative control of bank lending in total (in pursuit of monetary control) and to...

Extensions Of The Scope Of Banking And Financial Institution Operations

Encouraging Banks to Open Branches or Participate in Joint Ventures Abroad In order to support Bangkok as the financial centre in the region, the BoT allowed the commercial banks to open branches in Laos, Kampuchea, Vietnam, Burma, as well as mainland China. These branches could provide banking services not only to the local community, but also to Thai investors or foreign investors who use Thailand as a gateway or springboard to the region. Also, they would gather or collect prime information...

References

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