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Daniel James and Mr. Matthew I. Saal

Abstract

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.

Gillian Garcia

Abstract

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.

Ms. Claudia H Dziobek and Ceyla Pazarbaşioḡlu

Abstract

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.

Mr. Julio Escolano

Abstract

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.

International Monetary Fund

This Selected Issues paper for euro area policies analyzes the product market regulation and benefits of wage moderation. The paper identifies structural shifts in the relationship between wages and unemployment rates—a “wage curve”—in 20 industrial countries. It reviews euro area and cross-country developments in labor costs and their bivariate relationship with unemployment rates and business GDP. The paper also examines aspects of the European Central Bank’s monetary analysis, within the context of their overall two-pillar policy framework, and issues surrounding its use.

Mr. Carl-Johan Lindgren and Mr. D. F. I. Folkerts-Landau

Abstract

It is now well recognized that vulnerable and unstable banking systems can severely disrupt macro-economic performance in industrial, developing, and transition economies alike.1 The widespread incidence and the high cost of banking problems have prompted calls for concerted international action to promote the soundness and stability of banking systems. At the Lyon Summit in June 1996, the Group of Seven (G-7) industrial countries called for “the adoption of strong prudential standards in emerging market economies,” and encouraged the international financial institutions to “increase their efforts to promote effective supervisory structures in these economies.”2 These intentions were reinforced by the IMF Interim Committee’s “Partnership for Sustainable Global Growth” in September 1996 (see IMF, 1996). In Denver, in June 1997, the G-7 Ministers of Finance meeting considered a report by a Group of Ten (G-10) working party on financial stability in emerging market economies (G-10, 1997) and requested “the IMF and the World Bank to report to Finance Ministers next April on their efforts to strengthen the roles they play in encouraging emerging market economies to adopt the principles and guidelines identified by the supervisory community” (G-7, 1997). The G-7 Heads of Government then called “on the international financial institutions and the international regulatory bodies to fulfill their roles in assisting emerging market economies in strengthening their financial systems and prudential standards.” The Heads of Government also welcomed “the IMF’s progress in strengthening surveillance and promoting improved transparency. Increased attention to financial sector problems that could have significant macroeconomic implications, and to promoting good governance and transparency, will help prevent financial crises” (G-7, 1997).

Mr. Carl-Johan Lindgren and Mr. D. F. I. Folkerts-Landau

Abstract

The thrust of policy efforts to strengthen financial sector performance has to originate with national authorities. But the Fund and the international community at large have an important stake in the success of these efforts, because banking crises have macroeconomic consequences and may generate significant regional and international spillovers. As more countries remove remaining restrictions on their capital account transactions, and as banking and finance assumes a more regional and international dimension, the cross-border impact of banking system problems can be expected to increase as well. These considerations have motivated broad international interest in contributing to the effort to achieve greater stability in banking and financial systems around the world, culminating in the statement by G-7 Heads of Government in Denver. The Fund’s efforts to support the initiatives of many of its members to strengthen their financial system policies through its surveillance, lending, and technical assistance activities should be seen as part of this larger international effort now under way, and the Fund’s work will have to be in concert with the endeavors of this broader international initiative.

Mr. Carl-Johan Lindgren and Mr. D. F. I. Folkerts-Landau

Abstract

While not the subject of this paper, it must always be remembered that an unstable macroeconomic environment is a principal source of vulnerability in the financial system. Significant swings in the performance of the real economy, and volatile interest rates, exchange rates, asset prices, and inflation rates make it difficult for banks to assess accurately the credit and market risks they incur. Moreover, banks in many developing and transition economies have limited scope to diversify these risks as much as is possible in industrial economies. Large and volatile international capital flows often add to the challenges faced by banks in these countries. While Fund surveillance will seek to improve the macroeconomic framework, a structural framework for sound banking should also attempt to ensure that the macroeconomic risks are adequately reflected in prudential restraints and structural policies.

International Monetary Fund
Switzerland is affected by the global crisis through the stock effect, the flow effect, and the trade effect. Along with a sharp contraction in exports, investments are now being postponed. Consumption has held up well so far, but as unemployment rises, household spending will lose momentum. The Swiss National Bank has appropriately loosened monetary policy, bringing the policy rates almost to zero. Maintaining financial stability will be essential for ensuring macroeconomic stability and growth in Switzerland.
International Monetary Fund. European Dept.
This Selected Issues paper elaborates findings and discussions of 2013 Cluster Consultation Nordic Regional report. The countries have close economic and financial ties and face some common challenges and shared risks, such as large banking sectors and high household debt. The economic performance of the four continental Nordic economies (Denmark, Finland, Norway, and Sweden—Nordic-4) ranks among the advanced economic development circle. It is analyzed that the large Nordic banking systems support relatively high levels of private sector debt. House price developments in the Nordic-4 pose a risk to broader macroeconomic stability in the context of strained household balance sheets.