Features of Recent Banking Crises: An Overview
|Country and Crisis Period||Magnitude of Losses||Resolution Methods||Financial Sector Reforms||Macroeconomic Factors|
|Indonesia, 1992-93||Nonperforming loans estimated at 26 percent of total loans by the end of 1993, about $18.4 billion or 13 percent of GNP. One private bank closed; 26 private banks considered insolvent; major weaknesses discovered in state bank loan portfolio.1||Restructured and recapitalized state-owned banks with borrowed funds.|
Closed or merged private banks with some central bank financial support.
No formal deposit insurance was enacted, resulting in some losses to depositors.
Made special efforts to recover loans from large borrowers.
Held special audits of private banks and special supervision teams to monitor problem loans
|Interest rates liberalized and indirect instruments adopted in 1983.|
Entry eased and selective credit abolished in 1988.
Measures to strengthen banking supervision increased in 1991-92.
Weaknesses have been addressed in bank liquidation rules and loan recovery arrangement through new regulations in 1995.
Prudential controls eased in May 1993 to encourage bank lending.
|Boom in investment and credit growth following 1988 financial sector and investment liberalization. Major tightening of monetary policy and high real interest rates in 1992-93.|
|Nordic countries, 1990-92||The state absorbed loan losses of between 5 percent and 7 percent of GNP by recapitalization and liquidity support. Large number of banks faced liquidity crisis; depletion of capital and loss of public confidence occurred.||Public guarantee of all deposits.|
Government takeover of failed banks.
Formation of “bad banks”—asset management companies—to deal with problem loans
|Credit control and interest rates liberalized in mid- 1980s. Insufficient attention to strengthening capital adequacy and prudential supervision.||Major expansion in credit/ GNP ratio following deregulation. Major shifts in real interest rates and real exchange rates, and asset price inflation. High debt equity ratio of nonfinancial firms.|
|Turkey, 1994||Large short positions in foreign exchange and excessive depreciation of domestic currency led to losses and runs. Losses in government securities portfolio occurred as interest rates rose. Three midsized banks closed down. While financial distress was reportedly widespread and bank profitability weak, the magnitude of losses is unclear.||Expanded coverage of savings deposit insurance to 100 percent of deposits.|
Increased limits on central bank credit to individual banks.
Arranged for temporary administrators to oversee pay-off to eligible depositors.
Deposit insurance fund to initiate bankruptcy procedures
Established weaknesses in problem bank resolution options.
|Interest rates liberalized and indirect instruments adopted in mid-1980s, and competition strengthened.|
Some initial bank restructuring and measures to strengthen banking supervision implemented in mid-1980s. Sophisticated off-site analysis and early warning system established.
Limited reforms of stateowned banks that provided subsidized credit.
Inadequate bank accounting standards revised.
|Major macroeconomic factors during 1994 included instability, high and growing fiscal deficit, accelerating inflation, high real interest rates, and foreign exchange crisis.|
|Venezuela, 1994||Loan losses absorbed by the state through recapitalization and liquidity support totaled $9 billion in 1994, 13 percent of GNP. Three waves of bank runs, involving nearly 50 percent of the banking system in terms of deposits, triggered massive government intervention.||Government took over several failed banks.|
Provided large, unconditional liquidity assistance to some.
Closed some banks after paying off insured depositors.
Management control altered so as to work out a restructuring plan.
|Interest rates liberalized and indirect instruments adopted in 1989.|
Major portfolio weaknesses, which developed prior to 1989 when direct controls severely distorted credit allocation, were allowed to continue.
New laws to strengthen banking supervision became effective in late 1993. Prior to their establishment, enforcement of banking supervision had been weak, with significant weaknesses in accounting standards, coordination among supervisory agencies, and supervisory practices.
|Significant stabilization efforts during 1989-90 were reversed in 1990-91. The lax financial policies contributed to boom in asset prices and periodic capital flights, and exchange crisis in October 1992. Fiscal deficit remained unsustainably high in 1993; monetary policy erratic; very high real interest rates in 1992-93.|
Following the 1997 currency and banking crisis, the extent of the losses and the magnitude of banking insolvency were estimated to be considerably larger. For example, Moody’s estimated nonperforming loans at 30-75 percent of total loans (see Moody’s Investors Service, 1998).