Banking Soundness and Monetary Policy
Chapter

Discussion

Editor(s):
Charles Enoch, and J. Green
Published Date:
September 1997
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Mr. Khandruyev inquired about the future of specialized banks, as opposed to universal banks. Mr. George said that their future would be decided by the marketplace. The implication for bank regulators was that they would need to decide on a case-by-case basis whether central bank support for specialized banks would be justified; the answer would be difficult. Mr. George added that all kinds of banks could be present in any given banking system; each kind of bank would have to be regulated according to its own characteristics, a situation that raised difficult questions. His personal forecast was that the specialized banks would remain in existence, not in the old sense of the term, but that some institutions might decide to act in a narrow segment of the market.

Mr. Marino asked Mr. George to comment on the failure of Barings Bank. Mr. George responded that the situation in the case of this bank had been crystal clear. The problem of Barings was not systemic, even though there were systemic difficulties at the time. There was no reason to assume that if Barings failed there would be a contagion effect, either because of the nature of the problem or because of other banks’ exposure to Barings in the payment system. The Bank of England had to let Barings fail, to make known the true extent of the safety net it provided to banks. Letting Barings fail had done more to promote safe banking practices than any other action. Mr. Kelley added that the case of Barings also illustrated another point: the role of modern technology, which has become a great challenge for supervisors. Mr. Kelley said that it was necessary to emphasize the analysis of risk control system of the banks when supervising them, rather than merely the static analysis of past balance sheets.

Mr. Iltchev agreed with Mr. George’s message regarding Barings’ failure, saying that a problem of moral hazard appeared if a bank was held afloat for too long. Banks had to know that failure was part of the banking business. Timing of foreclosure was an important issue. In Bulgaria, if banks had been foreclosed when the first signs of troubles came up, the extent of the actions now needed would not be as large.

In answer to Amma Yeboaa, Mr. George indicated that the central bank used to provide liquidity through specialized institutions, but this was no longer the case. All institutions should compete in the marketplace without any special privileges. Mr. Kovacs commented that if a bank was closed, the value of its assets would decline; if no one was interested in buying the bank license as a growing concern, the supervisor would need to be mindful of the effect of the closure on the value of the bank’s assets and on the social consequences for small relatively unsophisticated depositors.

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