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Banking on crises : expensive lessons from recent financial crises, Volume 1
Author:Caprio Jr., Gerard; Country:Brazil; Colombia; Hong Kong SAR, China; Korea, Republic of; Peru; Philippines; Malaysia; Chile; Argentina; Indonesia; Thailand; Singapore;
Date Stored:1998/11/17Document Date:1998/09/30
Document Type:Policy Research Working PaperSubTopics:Environmental Economics & Policies; Payment Systems & Infrastructure; Financial Crisis Management & Restructuring; Economic Theory & Research; Banks & Banking Reform; Labor Policies; Financial Intermediation
Language:EnglishMajor Sector:Finance
Region:East Asia and Pacific; Latin America & CaribbeanReport Number:WPS1979
Sub Sectors:Capital Markets DevelopmentCollection Title:Policy, Research working paper ; no. WPS 1979
Volume No:1  

Summary: Caprio summarizes both basic and proximate factors behind financial crises, arguing that although a variety of factors contribute to the crises, the basic causes are information and incentive problems. Caprio develops a scoring system for the broad regulatory environment for a dozen Asian and Latin American financial systems in 1997. The Asian economies in crises score the lowest. Economies with the highest scores felt relatively little impact from the crises. This paper will address these issues. Section II will summarize briefly the voluminous literature on proximate and more distant causes of crises. Although both micro and macro factors are associated with crises, beyond lobbying for changes in the international financial system, national authorities are left with following sound macro policies, improving financial sector infrastructure, and upgrading regulation and supervision as mean of minimizing the likelihood and costs of financial crises. Is there a payoff to improving the regulatory framework? Tentative evidence presented in section III, which compares the broad regulatory environment in 12 selected Asian and Latin American countries, suggests that the answer is affirmative. This comparison both reveals how some countries have been progressing, and can help as a guide, indicating weak areas of regulation that should be a target for further improvement. Generally, those countries that have higher scores on their regulatory systems appear to have weathered the latest crisis well, suggesting that improving the regulatory environment, broadly interpreted, should be a goal for countries that have not thus far made much headway in this area. A plausible hypothesis then is that authorities are learning -- at great cost - - from the last 2 decades of crises and are moving to raise the cost or otherwise tighten the safety net supporting the banking sector. Section IV concludes with unresolved issues and suggestions for future research.

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