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 difficulties are transmitted internationally and produce such a banking crisis in a number of countries.

We examined the principal forces that have triggered past banking crises, emphasizing the roles of macroeconomic and especially monetary instability, and of weaknesses of governance and of internal control. We also examined the international transmission of financial crises, focusing on the example of Asian crisis of 1997 and 1998, and pointing out that the severity of these problems was due to an important degree to the pursuit of an unstable exchange rate regime.

With this discussion in mind we then assessed whether there has indeed been any increase in the risk of an international banking crisis. On the contrary, we find that improved monetary discipline and standards of bank governance and risk management, together with a moderate degree of portfolio diversification arising from the slowly increasing internationalization of commercial banking, has reduced the likelihood of an international banking crisis. The macroeco-nomic environment is more stable. Banks are better run. International diversification of income streams affords a further degree of protection.

There are still potential problems of adjustment. Individual institutions entering into new markets in other countries face a difficult challenge in managing both financial and business risks. Resulting losses could in turn impact on their domestic banking systems. The expectation of unlimited state support may allow banks that get into difficulties to take excessive risks, or even to effectively defraud the state through the looting of bank assets. The risks of some international banking crisis cannot therefore be said to be entirely negligible. But these are risks that need to be dealt with through improvements in corporate governance and clearer delimitation of the scope for state support of failing banks. In order to ensure international financial stability it is necessary neither to impose limitations or restrictions on the internationalization of the banking industry nor to extend the role of lender of last resort so as to provide a general protection against the possibility of losses on international financial exposures.

Financial End Game

Financial End Game

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