In a generally healthy and well-regulated banking system, individual banks can and usually should be allowed to fail. Allowing market discipline and supervisory intervention to weed out weak institutions minimizes moral hazard. Where vulnerability is widespread, however, the potential negative externalities associated with widespread bank failures may call for intervention beyond what can be accomplished by the market or standard supervisory instruments.1 Systemic bank restructuring comprises a comprehensive program to rehabilitate a significant part of a banking system so as to provide vital banking services efficiently on a sustainable basis. Such restructuring programs have been undertaken by some 30 Fund member countries over the last fifteen years in a range of economic and political circumstances.
The goal of systemic bank restructuring is to restore or create a sound banking system that can provide efficient banking services to the economy on a sustainable basis. Although this goal is expressed in terms of the system as a whole, its accomplishment requires a wide array of microeconomic, institutional, and regulatory measures, some of which must be geared to the circumstances of individual banks. This Chapter provides a framework for assessing restructuring strategies and instruments by linking these to the framework for sound banking developed in Bank Soundness and Macroeconomic Policy (Lindgren, Garcia, and Saal, 1996). The determinants of a sound banking system developed in that volume are strong internal governance by bank managers and owners, external governance by markets and supervisors, and a generally stable economy. It follows then, that a program to restructure a banking system must resolve problems at the level of the individual banks, the banking system, and the macroeconomy.
Chapter 3 provides background material for Chapters 1 and 2. It analyzes the experiences of selected countries that have undertaken systemic bank restructuring in recent years, with a view to drawing lessons about successful restructuring strategies and best practices. “Best practices” are defined as those that are observed, based on experience over time and across a broad group of countries, to contribute to a successful bank-restructuring outcome. Accordingly, a basic requirement of best practices is that they should be robust to a reasonably wide range of conditions faced by restructuring countries. At the same time, best practices also involve being able to modify elements of the restructuring strategy to conform to the particular circumstances of the problem in each individual country.
This chapter focuses on the tax treatment of loan losses of banks and other regulated credit institutions under the corporate income tax. The issue has been prominent in recent debates on the tax treatment of financial institutions owing mainly to two factors. The first is that during recent episodes of financial distress, loan losses have been perhaps the most significant cause of bank insolvencies and fiscal or quasi-fiscal costs. In this context, ill-designed methods of tax deduction of loan losses can be expected to result in either a substantial decline in tax revenue or an impediment to the resolution of a banking crisis. The second factor is that, until now, international convergence on regulatory matters has achieved the highest degree of success in measuring credit risk and defining minimum capital requirements against the risk of bank failure owing to loan losses. As a result, an opportunity has been created to base the tax treatment of loan losses on a common international conceptual framework.
Banking sector problems have affected many IMF member countries, and measures to remedy these problems as well as to prevent their recurrence deeply concern central bankers and policymakers. the papers and comments published in this volume and edited by Charles Enoch and John H. Green were presented at the Seventh Seminar on Central Banking sponsored by the IMF. The topics discussed include banking soundness and the macroeconomy, prudential standards, the role of the central bank during problems of banking soundness, and bank restructuring.
This report presents the annual survey of international capital market developments and prospects. It reviews trends in the main market segments and seeks to analyze the principal forces underlying these developments, in particular the progressive integration of markets and the related globalization of investor and borrower behavior. Against this background, the study examines the financing of the current account imbalances among the main industrial countries, and reviews recent developments affecting capital market financing for developing countries. The paper also looks at a number of issues that have arisen from these developments, including efforts to promote an efficient and stable system of capital markets, the process of trade liberalization in the financial services sector, the pressures toward international harmonization of tax systems, and recent initiatives to foster debt reduction for heavily indebted developing countries.
This section discusses broad trends in international financial intermediation since the start of 1988. A feature of this period has been that current account imbalances in the large industrial countries were principally financed by private capital flows, rather than through large-scale central bank intermediation as in 1987. The shift in financing patterns was accompanied by a surge in intermediation through bond markets relative to 1987 when intervention had boosted banking flows, particularly in the interbank market. Flows related to direct investment and syndicated credits also increased significantly in this period, partly reflecting the continued high level of mergers and acquisitions. Portfolio investments in equity, however, remained below levels experienced before the October 1987 stock market break.
In the early years after the onset of the debt crisis in 1982, developing countries with debt problems tended to have access to capital market financing primarily in the form of reschedulings of principal obligations falling due and, in some cases, arrangement of new loans—usually on a concerted basis where new money was provided by banks as part of a collective effort including support from official sources. This approach was viewed as the appropriate response to what was regarded primarily as a “liquidity” problem faced by debtors, and was consistent with the weak underlying financial position of the major commercial banks that precluded wholesale writedowns of exposure to problem debtors.