This paper was written in the Spring of 1995 while Mr. Nyberg was a consultant to the Monetary and Exchange Affairs Department (MAE) and has been used as a background paper in several MAE workshops on systemic bank restructuring. Mr. Nyberg is Advisor to the Board of the Bank of Finland. The author is thankful to the staff of the Banking Supervision and Regulation Division and to Mr. Vicente Galbis for useful comments.
Such issues are likely to differ somewhat between countries, but could include the maximum total amount of government support to banks, the role of foreign ownership, identification of any “politically sensitive” bank or enterprise to be excluded from the regular restructuring exercise, and the speed of privatization or reprivatization when relevant.
Such commercial considerations, however, must be modified by judgements on how solutions in individual cases are likely to affect financial stability. For instance, a nonviable bank may be merged rather than closed if closure is thought likely to cause a liquidity crisis; or a marginally viable bank may be closed rather than rehabilitated if financial markets appear to accept and expect such a decision. However, departure from commercial criteria should always be clearly argued and motivated to enable parliamentary investigators to assess the decision.
Because the division of responsibilities differs among countries, it is difficult to give generally valid reasons for or against choosing particular institutions to be responsible for bank restructuring. The more concentrated the responsibility for the banking sector in any one authority, the stronger would be the reasons to give that authority also responsibility for bank restructuring. However, such decisions should take into account that (a) the emergence of banking problems indicates that the authorities responsible may not have been doing their job well; and (b) there may be a risk of conflicts of interest involving those authorities’ other responsibilities.
This assumes that the government always and unquestionably honors both its guarantees and other liabilities on time. This is an absolutely vital cornerstone of any well-functioning financial market, and is a precondition for any government restructuring policy to work.