Sensible debt buybacks for highly indebted countries

Previous studies indicate that debt buybacks at market prices benefit lenders the most because the lack of a seniority structure in sovereign lending distorts secondary market prices upward. The author examines whether welfare-improving buybacks would arise at the"fair"price. If so, policy intervention is needed to remove the distortion. In a model of intertemporal consumption smoothing, buybacks at the fair price are desirable if the country experiences unusually heavy export earnings and if large reserve holdings tend to increase transfers to creditors in default states. Concerted agreements in which debt repurchases are linked to cuts in interest rates or new money requirements can make buybacks at the fair price viable, while preventing the free-rider problem among lenders.Economic Theory&Research,Banks&Banking Reform,Environmental Economics&Policies,Financial Intermediation,Strategic Debt Management

Cross-country empirical studies of systemic bank distress : a survey

A rapidly growing empirical literature is studying the causes and consequences of bank fragility in contemporary economies. The authors reviews the two basic methodologies adopted in cross-country empirical studies-the signals approach and the multivariateprobability model-and their application to study the determinants of banking crises. The use of these models to provide early warnings for crises is also reviewed, as are studies of the economic effects of banking crises and of the policies to forestall them. The paper concludes by identifying directions for future research.Banks&Banking Reform,Financial Intermediation,Financial Crisis Management&Restructuring,Macroeconomic Management,Financial Economics

Basel core principles and bank soundness : does compliance matter ?

This paper studies whether compliance with the Basel Core Principles for effective banking supervision is associated with bank soundness. Using data for more than 3,000 banks in 86 countries, the authors find that neither the overall index of compliance with the Basel Core Principles nor the individual components of the index are robustly associated with bank risk measured by Z-scores. The results of the analysis cast doubt on the usefulness of the Basel Core Principles in ensuring bank soundness.Banks&Banking Reform,Public Sector Corruption&Anticorruption Measures,Financial Intermediation,Debt Markets,Hazard Risk Management

Financial liberalization and financial fragility

The authors study the empirical relationship between banking crises and financial liberalization using a panel of data for 53 countries for 1980-95. They find that banking crises are more likely to occur in liberalized financial systems. But financial liberalization's impact on a fragile banking sector is weaker where the institutional environment is strong--especially where there is respect for the rule of law, a low level of corruption, and good contract enforcement. They examine evidence on the behavior of bank franchise values after liberalization. They also examine evidence on the relationship between financial liberalization, banking crises, financial development, and growth. the results support the view that, even in the presence of macroeconomic stabilization, financial liberalization should be approached cautiously in countries where institutions to ensure legal behavior, contract enforcement, and effective prudential regulation and supervision are not fully developed.Banks&Banking Reform,Financial Crisis Management&Restructuring,Insurance&Risk Mitigation,Payment Systems&Infrastructure,Insurance Law,Financial Economics,Financial Intermediation,Banks&Banking Reform,Financial Crisis Management&Restructuring,Insurance&Risk Mitigation

Monitoring banking sector fragility : a multivariate logit approach with an application to the 1996-97 banking crises

The authors explore how a multivariate logit empirical model of banking crisis probabilities can be used to monitor fragility in the banking sector. The proposed approach relies on readily available data, and the fragility assessment has a clear interpretation based on in-sample statistics. Also, the monitoring system can be tailored to fit the preferences of the decisionmakers, and the model has better in-sample performance than currently available alternatives. Despite these advantages, the monitoring system would have missed the 1997 banking crises in Indonesia, Malaysia, and the Republic of Korea, while it would have detected some weakness in Thailand and the Philippines. It would have clearly foreseen the 1996 crisis in Jamaica. Aggregate variables can convey information about general economic conditions often associated with fragility in the banking sectorbut are silent about the situation at individual banks or in specific segments of the banking sector - so crises that may develop from specific weaknesses in some market segments and spread through contagion would not be detected. The econometric study of systemic banking crises is a relatively new field of study. The development and evaluation of monitoring and forecasting tools based on the results of studies such as this are at an embryonic stage at best. The authors highlight elements that need to be evaluated in developing"ready-to-use"procedures for decision-makers and explore possible avenues for doing so. The monitoring system must be designed to fit the needs of policymakers, so systems must be developed as part of an interactive process involving both econometricians and decisionmakers.Statistical&Mathematical Sciences,Banks&Banking Reform,Labor Policies,Payment Systems&Infrastructure,Financial Crisis Management&Restructuring,Banks&Banking Reform,Statistical&Mathematical Sciences,Financial Crisis Management&Restructuring,Financial Intermediation,Economic Theory&Research

Interest rates, official lending, and the debt crisis : a reassessment

The authors document and try to explain the sizable cross-country differences in interest rates on external debt paid by a group of highly indebted developing countries in 1973-89. They find that Indonesia and Turkey, which are often praised for not rescheduling in the 1980s, paid interest rates substantially below LIBOR - and avoided the interest rate shock of the early 1980s. Differences in the default-risk premium explain some of the variation among countries, but different degrees of access to official loans carrying highly subsidized interest rates played the major role. In the sample they studied, they found no evidence that debt at floating interest rates was more expensive than debt at fixed rates. For the period 1981-89, it is possible to control for differences in the currency composition of debt, and the results are essentially unchanged. These results suggest that studies of economic performance among the highly indebted countries during the debt crisis should control for cross-country differences in the burden of interest payments.Economic Theory&Research,Strategic Debt Management,Environmental Economics&Policies,Banks&Banking Reform,Financial Intermediation

Does deposit insurance increase banking system stability ? An empirical investigation

Based on evidence of 61 countries in 1980-97, the authors find that explicit deposit insurance tends to be detrimental to bank stability, the more so where bank interest rates are deregulated and the institutional environment is weak. The adverse impact of deposit insurance on bank stability tends to be stronger the more extensive is the coverage offered to depositors, and where the scheme is funded and run by the government rather than the private sector.Financial Intermediation,Banks&Banking Reform,Insurance&Risk Mitigation,Financial Crisis Management&Restructuring,Insurance Law,Insurance&Risk Mitigation,Financial Crisis Management&Restructuring,Financial Intermediation,Insurance Law,Banks&Banking Reform

The determinants of banking crises : evidence from industrial and developing countries

In the 1980s and 1990s several countries experienced banking crises. The authors try to identify features of the economic environment that tend to breed problems in the banking sector. They do so by economically estimating the probability of a systemic crisis, applying a multivariate logic model to data from a large panel of countries, both industrial and developing, for the period 1980-94. Included in the panel as controls are countries that never experienced banking problems. The authors find that crises tend to occur in a weak macroeconomic environment characterized by slow GDP growth and high inflation. When these effects are controlled for, neither the rate of currency depreciation nor the fiscal deficit are significant. Also associated with a high probability of crisis are vulnerability to sudden capital outflows, low liquidity in the banking sector, a high share of credit to the private sector, and past credit growth. Another factor significantly (and robustly) associated with increased vulnerability in the banking sector is the presence of explicit deposit insurance, suggesting that moral hazard has played a major role. Finally, countries with weak institutions (as measured by a"law and order"index) are more likely to experience crises.Labor Policies,Payment Systems&Infrastructure,Financial Intermediation,Banks&Banking Reform,Financial Crisis Management&Restructuring,Financial Economics,Banks&Banking Reform,Financial Crisis Management&Restructuring,Financial Intermediation,Insurance&Risk Mitigation

Banking on the principles : compliance with Basel Core Principles and bank soundness

This paper studies whether compliance with the Basel Core Principles for Effective Banking Supervision (BCP) improves bank soundness. BCP compliance assessments provide a unique source of information about the quality of bank supervision and regulation around the world. The authors find a significant and positive relationship between bank soundness (measured with Moody's financial strength ratings) and compliance with principles related to information provision. Specifically, countries that require banks to report regularly and accurately their financial data to regulators and market participants have sounder banks. This relationship is robust to controlling for broad indexes of institutional quality, macroeconomic variables, sovereign ratings, as well as reverse causality. Measuring soundness through z-scores yields similar results. The findings emphasize the importance of transparency in making supervisory processes effective and strengthening market discipline. Countries aiming to upgrade banking regulation and supervision should consider giving priority to information provision over other elements of the Core Principles.Banks&Banking Reform,Financial Intermediation,Corporate Law,Financial Crisis Management&Restructuring,Insurance&Risk Mitigation

Inside the crisis : an empirical analysis of banking systems in distress

Much of the substantial literature on banking crises, focuses on early warning indicators. The authors look at what happens to the economy, and the banking sector after a banking crisis breaks out. Much of the theory of banking crises assigns a central role to depositor runs, with vulnerability to runs viewed as a basic characteristic of banks as financial intermediaries. But banking systems can be financially distressed, even when depositors do not withdraw their deposits, if other bank creditors rush for the exit, or if banks become insolvent. Are contemporary banking crises characterized by large declines in deposits? The authors find that contemporary banking crises are not accompanied by declines in aggregate bank deposits, and credit does not fall relative to output, but the growth of both deposits, and credit does slow down substantially. Output recovery begins the second year after the crisis, and is not led by a resumption of credit growth. Instead, banks (including the stronger banks) reallocate their asset portfolio away from loans. This suggests that protecting deposits during a banking crisis, may not be enough to protect bank credit, as lack of usable collateral, and poor borrower creditworthiness, discourage banks from lending. However, protecting bank credit may not be a priority right after a crisis, as the real economy can rebound without it, at least while there is substantial under-used capacity.Financial Intermediation,Banks&Banking Reform,Financial Crisis Management&Restructuring,Payment Systems&Infrastructure,Economic Theory&Research,Banks&Banking Reform,Financial Intermediation,Financial Crisis Management&Restructuring,Economic Theory&Research,Insurance&Risk Mitigation