IDEAS home Printed from https://ideas.repec.org/p/wbk/wbrwps/2540.html
   My bibliography  Save this paper

Recapitalizing banking systems : implications for incentives and fiscal and monetary policy

Author

Listed:
  • Honohan, Patrick

Abstract

In the aftermath of a banking crisis, most attention is rightly focused on allocating losses, rebuilding properly managed institutions, and achieving debt recovery. But the authorities'decision to use budgetary funds to help restructure a large failed bank or banking system also has consequences for the incentive structure for the new bank management, for the government's budget, and for monetary stability. These issues tend to be lumped together, but each should be dealt with in a distinctive manner. The author points out, among other things, how apparent conflicts between the goals in each of these areas can be resolved by suitably designing financial instruments and appropriately allocating responsibility between different arms of government. First the government must have a coherent medium-term fiscal strategy that determines broadly how the costs of the crisis will be absorbed. Then the failed bank must be securely reestablished with enough capital and franchise value to move forward as a normal bank. This will typically entail new financial institutions involving the government on boththe asset and the liability sides of the bank's balance sheet. The bank should not be left with mismatches of maturity, currency, repricing. Assets that are injected should be bankable and preferably negotiable. The liability structure should give bank insiders the incentive to manage the bank prudently. Financial instruments can be complex and sophisticated but only if the government has the credibility to warrant market confidence that it will deliver on the contracts rather than trying to use its lawmaking powers to renege. Innovative use of segregating sinking funds and"Brady"-type bonds can help where government credibility is weak. Restructuring the bank will alter the size, maturity, and other characteristics of the government's debt. These characteristics should be optimized separately and with the market as a whole, not just the affected banks.

Suggested Citation

  • Honohan, Patrick, 2001. "Recapitalizing banking systems : implications for incentives and fiscal and monetary policy," Policy Research Working Paper Series 2540, The World Bank.
    • Handle: RePEc:wbk:wbrwps:2540
    as

    Download full text from publisher

    File URL: http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2001/03/09/000094946_01022405385810/Rendered/PDF/multi_page.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2001. "Prospective Deficits and the Asian Currency Crisis," Journal of Political Economy, University of Chicago Press, vol. 109(6), pages 1155-1197, December.
    2. Honohan, Patrick & Klingebiel, Daniela, 2000. "Controlling the fiscal costs of banking crises," Policy Research Working Paper Series 2441, The World Bank.
    3. Chang, R. & Velasco, A., 1998. "Financial Crises in Emerging Markets: A Canonical Model," Working Papers 98-21, C.V. Starr Center for Applied Economics, New York University.
    4. Roberto Chang & Andres Velasco, 1998. "Financial Crises in Emerging Markets," NBER Working Papers 6606, National Bureau of Economic Research, Inc.
    5. Maria Soledad Martinez Peria, 2002. "The Impact of Banking Crises on Money Demand and Price Stability," IMF Staff Papers, Palgrave Macmillan, vol. 49(3), pages 1-1.
    6. Mr. Burkhard Drees & Ceyla Pazarbasioglu, 1998. "The Nordic Banking Crisis: Pitfalls in Financial Liberalization: Pitfalls in Financial Liberalization," IMF Occasional Papers 1998/007, International Monetary Fund.
    7. Squire, Lyn, 1989. "Project evaluation in theory and practice," Handbook of Development Economics, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 2, chapter 21, pages 1093-1137, Elsevier.
    8. Klingebiel, Daniela, 2000. "The use of asset management companies in the resolution of banking crises - cross-country experience," Policy Research Working Paper Series 2284, The World Bank.
    9. Stijn Claessens & Simeon Djankov & Daniela Klingebiel, 1999. "How to Accelerate Corporate and Financial Sector Restructuring in East Asia," World Bank Publications - Reports 11452, The World Bank Group.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gary Gorton & Lixin Huang, 2004. "Liquidity, Efficiency, and Bank Bailouts," American Economic Review, American Economic Association, vol. 94(3), pages 455-483, June.
    2. Iustina Alina Boitan, 2015. "Output Loss Severity across EU Countries. Evidence for the 2008 Financial Crisis," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 11(4), pages 117-126, August.
    3. Kulam, Adam, 2021. "Thailand Capital Support Facilities 1998," Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 3(3), pages 664-704, April.
    4. Scott, David, 2002. "A practical guide to managing systemic financial crises : a review of approaches taken in Indonesia, the Republic of Korea, and Thailand," Policy Research Working Paper Series 2843, The World Bank.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dado, Marinela E. & Klingebiel, Daniela, 2002. "Decentralized credtor-led corporate restructuring - cross-country experience," Policy Research Working Paper Series 2901, The World Bank.
    2. Aaron Tornell & Frank Westermann (ed.), 2005. "Boom-Bust Cycles and Financial Liberalization," MIT Press Books, The MIT Press, edition 1, volume 1, number 9780262201599, April.
    3. Philippe Martin & Helene Rey, 2002. "Financial Globalization and Emerging Markets: With or Without Crash?," NBER Working Papers 9288, National Bureau of Economic Research, Inc.
    4. Peter Ignatiev, 2004. "Theoretical Models of Financial Crises," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 110-130.
    5. Aaron Tornell & Frank Westermann, 2002. "Boom-Bust Cycles in Middle Income Countries: Facts and Explanation," IMF Staff Papers, Palgrave Macmillan, vol. 49(Special i), pages 111-155.
    6. Aaron Tornell & Frank Westermann & Lorenza Martinez, 2004. "The Positive Link Between Financial Liberalization Growth and Crises," UCLA Economics Working Papers 834, UCLA Department of Economics.
    7. Femminis, Gianluca & Ruggerone, Luigi, 2001. "'Crony Capitalism', Bail Outs and Bank Runs," CEPR Discussion Papers 2751, C.E.P.R. Discussion Papers.
    8. Aaron Tornell, 2003. "Liberalization, Growth and Financial Crises (October 2003)," UCLA Economics Online Papers 276, UCLA Department of Economics.
    9. Marina Halac & Sergio Schmukler, 2003. "Distributional effects of crises : the role of financial transfers," Policy Research Working Paper Series 3173, The World Bank.
    10. Frankel, Jeffrey, 2010. "Monetary Policy in Emerging Markets," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 25, pages 1439-1520, Elsevier.
    11. Haizhou Huang & Chenggang Xu, 1999. "Financial Institutions, Financial Contagion, and Financial Crises," CID Working Papers 21, Center for International Development at Harvard University.
    12. Dooley, Michael P., 2000. "International financial architecture and strategic default: can financial crises be less painful?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 53(1), pages 361-377, December.
    13. Aaron Tornell & Frank Westermann & Lorenza Martinez, 2003. "Liberalization, Growth, and Financial Crises: Lessons from Mexico and the Developing World," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2), pages 1-112.
    14. Hefeker, Carsten, 2004. "Default, Electoral Uncertainty and the Choice of Exchange Regime," HWWA Discussion Papers 298, Hamburg Institute of International Economics (HWWA).
    15. repec:zbw:bofitp:2005_013 is not listed on IDEAS
    16. Sheriffdeen A. Tella & Olumuyiwa G. Yinusa & Ayinde Taofeek Olusola & Saban Celik, 2011. "Global Economic Crisis And Stock Markets Efficiency: Evidence From Selected Africa Countries," Bogazici Journal, Review of Social, Economic and Administrative Studies, Bogazici University, Department of Economics, vol. 25(1), pages 139-169.
    17. Proto, Eugenio, 2005. "Growth expectations and banking system fragility in developing economies," BOFIT Discussion Papers 13/2005, Bank of Finland, Institute for Economies in Transition.
    18. Komulainen, Tuomas, 2001. "Currency crises in emerging markets : Capital flows and herding behaviour," BOFIT Discussion Papers 10/2001, Bank of Finland, Institute for Economies in Transition.
    19. Roberto Chang & Andrés Velasco, 2000. "Liquidity Crises in Emerging Markets: Theory and Policy," NBER Chapters, in: NBER Macroeconomics Annual 1999, Volume 14, pages 11-78, National Bureau of Economic Research, Inc.
    20. Michael P. Dooley, 2000. "Can Output Losses Following International Financial Crises be Avoided?," NBER Working Papers 7531, National Bureau of Economic Research, Inc.
    21. Xiuping Hua & Anders C. Johansson & Xun Wang, 2017. "National and regional financial openness in China," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 15(2), pages 127-140, April.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:2540. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Roula I. Yazigi (email available below). General contact details of provider: https://edirc.repec.org/data/dvewbus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.