Front Matter Page
Middle Eastern Department
Table of Contents
Summary
I. Introduction
II. Sequencing of Banking Restructuring and Prudential Supervision Policies
A. Lessons of Country Experiences
B. Sequencing of Banking Supervision and Restructuring
C. Preparatory Stage (stage 1)
D. Prudential Reforms to Support Stabilization and Market Development (stage 2)
E. Risk Management to Consolidate Market Development (stage 3)
III. Significance and Sequencing of Financial Restructuring Policies
A. Components of Bank and Enterprise Restructuring
B. Sequencing of Financial Restructuring Policies—Need for Transitional Measures
C. Debt Reduction and Debt-to-Equity Conversion as a Transitional Measure
IV. Concluding Remarks
References
Tables
1. Features of Recent Banking Crises—An Overview
2. Banking Supervision and Financial Restructuring During Various Stages of Financial Sector Reform
Summary
This paper argues that appropriate sequencing of financial restructuring and prudential supervision policies can speed up liberalization of interest rates and adoption of indirect monetary policy instruments and facilitate stabilization. The paper presents a stylized sequencing of banking supervision and restructuring measures and illustrates their relationship to the development of monetary operations, based on country experiences and taking into consideration the technical linkages among specific structural reforms, their macroeconomic effects, and the scope for fostering market discipline and internal governance.
Country experiences suggest specific principles of appropriate sequencing. First, a critical mass of accounting rules, prudential norms and supervisory procedures can, and should be, introduced initially, and then progressively refined in line with the evolution of financial markets and of internal governance of financial institutions. Second, a front-loaded package of policies to restructure both bank and enterprise finances should be designed to reduce the debt-equity ratio of nonfinancial firms, strengthen bank assets, and set the stage for comprehensive restructuring of both bank and enterprises over the medium term. Third, policies to strengthen prudential supervision should be combined and coordinated with policies to restructure banks and establish institutional arrangements for loan recovery and enterprise restructuring, in order to avoid risks of moral hazard.
Such well-coordinated financial restructuring of both banks and enterprises can enhance the prospects for rapid financial liberalization by containing the initial fiscal cost of bank restructuring, partly through the offsetting budgetary effects of improved enterprise finances.