Estudio de las características de los vidriados

oversight, in a weak

institutional environment

institutional building to ensure that the system is “good” takes consider- able time. Without adequate institutional development, the risk that deposit insurance could lead to crises, less financial sector development, more poorly functioning financial markets, and ultimately slower growth and higher poverty levels is real. Thus, authorities considering deposit insurance should make an audit of their institutional framework the first step in the decisionmaking process. Countries that do decide to estab- lish an explicit deposit insurance system should draw on these results of experience, which utilize known market forces to ensure prudence.

Conclusions

T

HE CONSISTENT MESSAGE OF THIS CHAPTER IS THUS THAT bank owners and other market participants should be viewed as necessary complements to official supervisors in monitoring banks. Whatever the prudential regulations that are put in place—and it may be that more is needed than simply focusing on capital adequacy (cf. Honohan and Stiglitz 2001)—ensuring compliance is the major stumbling block. Given information problems and the difficulty in understanding well how incentives are functioning, excessive weight on one group as the principle monitor is akin to excessive concentration in a bank’s portfolio. It may appear to pay off nicely until failing miserably. The strategic approach for authorities is to use incentives wherever they can be applied to maximize the number of motivated, watchful eyes.

Easy access to an implicit or explicit safety net confers a subsidy on banks, which encourages excessively bank-dependent—and debt- intensive—economies. Putting in place the recommendations of this chap- ter and effectively eliminating or greatly reducing this subsidy will remove this distortion and encourage the nonbank financial sector to develop. To be sure, there are some risks here, to the extent that it is near-bank activity just outside the scope of the regulations that occurs, and regulatory design needs to be adaptive to avoid such arbitrage opportunities. To the extent, however, that it allows the emergence of nonbank types of finance, includ- ing market-traded equity and bonds, and the associated collective savings institutions and other financial services activities, this will help the alloca- tion of risks and lower the cost of risk capital. Risk and fraud are present in

nonbank finance, too, but the existence of risk is known to all participants and is rewarded by higher expected returns. Fraud needs to be dealt with through responsible disclosure standards and stiff penalties, as well as some consumer-oriented regulations. With a safer banking system in place, au- thorities will be better able to avoid going down the dangerous road of extending the safety net beyond banking.

There is no doubt that concentration of ownership and control, noted in chapter 1, can limit the efficacy of nonbank financial institutions and mar- kets in providing independent sources of finance and independent checks on the powers of powerful interests. Along with increasing access to foreign financial services (chapter 4), however, broadening capital markets over time promises to provide greater diversity and stability to the financial sector. Improvements to basic financial infrastructure—enhancing disclosure and improving the protection of shareholders and creditors, as noted in chapter 1—will be instrumental in this task. To be sure, these recommendations may be difficult to implement, because politicians will need all their skills in combating powerful interests. Developing an awareness in society of the costs that many, including the poor, must pay for a weak incentive environ- ment should help bolster support for improvements in the framework. The forces of globalization (chapter 4) may help in this effort.

Notes

1. Kahneman and Tversky’s (1979) Prospect Theory holds that individuals’ assessments of gains and losses can vary depending on their initial situation and specifically may be averse to losses or loss realization, such as not selling stock whose prices fall.

2. As Kindleberger (1996, p. 66) notes, “...the pro- pensities to swindle and be swindled run parallel to the propensity to speculate during a boom...And the signal for panic is often the revelation of some swindle, theft, embezzlement, or fraud.”

3. Bagehot (1873, p. 131) reminds that during the South Sea Bubble, one of the companies whose shares were quoted was a bit peculiar. “But the most strange of all, per- haps, was ‘For an Undertaking which shall in due time be revealed.’ Each subscriber was to pay down two guineas, and hereafter to receive a share of one hundred, with a

disclosure of the object; and so tempting was the offer, that 1,000 of these subscriptions were paid the same morning, with which the projector went off in the afternoon.”

4. As Levine (1997) notes, Hicks(1969) concluded

that although the products in the early stages of the indus- trial revolution were invented several decades earlier, their large-scale manufacture had to await the financial revolu- tion that permitted the financing of illiquid investments.

5. Bernanke (1983) documented the credit channel for the Great Depression of the 1930s.The role of a sup- ply-driven “credit crunch” in exacerbating the East Asia crisis has been extensively debated (a representative collec- tion of the research literature is in Domaç, Ferri, and Kawai forthcoming). To the extent that a summary conclusion can be drawn, it appears that, while an acute credit squeeze affected firms, especially SMEs in the early stage of the

crisis, the economic downturn soon meant that demand for credit also declined, and relaunching credit supply no longer seemed to be the most pressing issue—though schol- ars will remain divided on the degree to which it did re- main a problem. For the future, the priority will be to en- sure that both macropolicy stability and the regulatory en- vironment will be sufficiently secure to make discussion of forbearance and subsidies unnecessary.

6. If three outliers are discarded, the correlation is 0.7 and a regression line implies an approximate one-to- one relationship between flow output costs and fiscal costs. This finding could be interpreted as suggesting that the different elements of cost are all correlated, and as sup- porting the use of fiscal cost as a general-purpose approxi- mation to the unobserved total economic cost.

7. Other goals, such as antidiscrimination and pro- motion of home ownership and of exports, continue to be pursued through detailed measures of financial policy in some countries, but these will not be discussed here. There has been a decline in the perceived effectiveness of policy measures that seek to direct the flow of finance to specific economic goals (Caprio, Hanson, and Honohan 2001).

8. Official action to help prevent the outright fail- ure of the highly leveraged hedge fund LTCM in 1998 was substantially driven by knowledge of the potential impact of such a failure on the stability of the banking system.

9. The ending of liquidity requirements in develop- ing countries came about in emulation of the new, best practice in the OECD area, and lower liquidity require- ments did alleviate somewhat the taxation of the finan- cial sector. Although liquidity ratios—holdings of central bank reserves, cash, and government paper—were not needed for prudential purposes in high-income countries, developing countries have not been able to upgrade bank supervision and regulation sufficiently to offset the loss of this buffer, cf. Caprio and Honohan (2001).

10. Overly simple or inflexible rules can have unfor- tunate side effects. In a downturn, for instance, rigid bank capital requirements can accentuate the recession by con- straining credit growth, especially if banks have to provi- sion more against loan losses (Chiuri, Ferri, and Majnoni

2000). However, the theoretical solution of making the capital requirements explicitly cycle-dependent (Dewatripont and Tirole 1993) may, in practice be hard to implement credibly or without risking a degree of for- bearance that could altogether undermine the incentive effect of having capital requirements.

11. It is not only emerging economies that underprovision. A recent Bank of Japan study (1998) found that 75.3 percent of loans classified in 1993–94 as doubtful at a sample of 18 banks became write-offs over the following three years—but required provisioning for such loans is only 52 percent; and that 16.7 percent of “category 2” loans, for which only a 2 percent provision is required, were written off.

12. The integration of financial sector supervision has received much attention, but is beyond the scope of this study. As integrated agencies are relatively recent, no for- mal quantitative research of their relative merits has been performed, and only anecdotal information (such as the continued difficulty in getting effective cooperation be- tween separate departments in a single agency) is avail- able. Still, as Goodhart (2000) argues, for emerging mar- kets this issue is premature and likely of second order rela- tive to fixing the overall incentive environment.

13. As Becker and Stigler (1974) note, “The appro- priate pay structure has three components: an ‘entrance fee,’ equal to the temptation of malfeasance, a salary pre- mium in each year of employment approximately equal to the income yielded by the ‘entrance fee,’ and a pension with a capital value approximately equal also to the temp- tation of malfeasance. As it were, enforcers post a bond equal to the temptation of malfeasance, receive the in- come on the bond as long as they are employed, and have the bond returned if they behave themselves until retire- ment. Put differently, they forfeit their bond if they are fired for malfeasance.”

14. On the other hand, it is recently reported that senior executives of Daiwa Bank have been held person- ally liable for losses caused by an inadequately supervised trader (Economist, November 16, 2000).

15. In some transitional cases, authorities may have been partly motivated by the possibility of European

Union (EU) accession and the agreed model for deposit insurance there.

16. Of course, since “big money” also is “smart money,” it may run first, and to the extent that authori- ties are concerned about a potential “systemic” crisis, they may elect to cover uninsured and large depositors, even including interbank claims, either through the deposit insurance fund or some other facility. Thus during the Continental Illinois difficulties in the United States, de- posit insurance was extended to all creditors.

17. At times, governments have exceeded their own coverage limits, but the empirical findings recounted below show that having lower ceilings does seem to matter.

18. The requirement in EU law for member states to cover a common euro amount of deposits has placed up- ward pressure on coverage levels in countries aspiring to EU membership.

19. In the United States, as in some countries, there is a limit on the total amount of funds in the deposit insurance fund. Once that limit is reached, banks are no longer assessed until funds drop below the ceiling. In this situation, banks face a zero premium, and clearly no risk differentiation.

20. Demirgüc-Kunt and Detragiache (1999) found— although in a small sample of 24 countries—that the cost

of crises also was higher with deposit insurance and weak institutional environments.

21. Similar arguments have been made in regard to foreign exchange reserves.

22. Any message that the coverage will be limited seems to be discounted in such institutional settings.

23. The latter can be significant in emerging mar- kets, where it has taken from months to as long as eight years for depositors to be paid in accordance with deposit insurance statutes.

24. Neither private nor public systems, however, were designed for systemic crises, but rather to prevent epi- sodes of individual bank failure from mushrooming into a systemic problem.

25. According to the La Porta and others (1997) data- base, Germany ranks among the highest in the protection of creditors’ rights. Also, as Beck (2000) reports, although only fraudulent bankruptcy is subject to prosecution, in Germany fraud can include violating “orderly business prac- tice,” which can be broadly interpreted. Hans Gerling, a principal of Herstatt Bank, contributed about 150 million DM to creditors to avoid legal entanglements after that bank failed. Moreover, the German Banking Act prohibits any manager involved in fraudulent bankruptcy from ever holding a managerial post in banking—as determined by regulatory officials rather than criminal prosecution.

S

INCE THE ADVENT OF BANKING, BOTH IN NORMAL TIMES and in times of crises, governments have taken ownership positions in banking either deliberately or indirectly as a result of a banking crisis. Instances of failed state owner- ship of banks, privatization followed by crises, and at best limited success in bank restructuring have occurred with sufficient frequency that a reconsideration of government’s role in these related areas is overdue. Although many governments have retreated somewhat in their ownership stake in the banking sector in recent decades, government bureaucrats remain active in banking, and in the wake of crises regularly increase their involvement significantly, often for lengthy periods. Yet new research shows that, whatever its original objectives, state ownership tends to stunt financial sector development, thereby contributing to slower growth.

The stable and efficient provision of financial services—regardless of who owns the financial firms providing them—is a realistic goal for all countries, the achievement of which necessitates that governments focus on what they do best. The previous two chapters set out an ambitious agenda for government’s role in laying the foundation and creating the regulatory superstructure for sound finance for development. This agenda will be difficult to achieve if the authorities’ attention is absorbed by tasks in which they do not have an advantage, notably permanent or temporary ownership of banks, especially when the latter role conflicts with their position as regulator.

Whereas the previous chapter treated how governments should respond to handle market failures, this chapter reviews the evidence and makes recommendations on government’s failures in owning and restructuring banks. Government failure as owner is attributed to the incentives imposed on it by the political process. The few cases of more successful

Government Failure in

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