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International Monetary Fund


In recent decades, many countries have experienced banking problems requiring a major—and expensive—overhaul of their banking systems. Often, the problems have domestic causes, such as weak banking supervision, political interference, and inadequate capital. Or a country’s banking system may be outmoded and in need of rebuilding, as in the case of many developing countries and all countries moving from centrally planned to market economies. Outside forces, such as a fall in the price of a key export product or commodity, can ignite or worsen a crisis.

Mr. Ashoka Mody and Mr. Abdul d Abiad


Given the difficulties inherent in undertaking any kind of reform, including financial sector reform, it is not surprising that inertia often sets in. The uncertainty over who will win and who will lose, the opposition of elite or special interest groups—these are just two of the issues facing policymakers considering reform. And yet many countries did reform their financial sectors during the last quarter of the twentieth century. What enabled—or forced—them to challenge the status quo?