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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.

Abstract

Edited by William Alexander, Jeffrey M. Davis, Liam P. Ebrill, and Carl-Johan Lindgren, this volume discusses cross-country restructuring experiences building on the foundation laid by its predecessor Band Soundness and Macroeconomic Policy. It discusses broad principles and actions to guide policy makers in restructuring their banking systems.