Front Matter
Author:
Mr. Tamim Bayoumi
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Mr. Paul R Masson
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Front Matter Page

Monetary and Exchange Affairs Department

Authorized for distribution by William E. Alexander

Contents

  • Summary

  • I. Introduction

  • II. Nonmarket Bank Restructuring: Lessons from the 1930s

  • III. Market-Based Instruments

    • A. Financial Instruments

    • B. Operational Restructuring Instruments

    • C. Structural Instruments

  • IV. Cost Sharing of Bank Restructuring Instruments

  • V. Conclusions

  • Table

  • 1. Instruments of Systemic Bank Restructuring

  • 2. Institutional Arrangements for Handling Bad Assets

  • 3. Costs and Cost Sharing in Bank Restructuring

  • References

Summary

In the last 20 years, more than 100 countries have experienced systemic bank insolvencies—the first occurrence of significant banking problems since the 1930s Great Depression. Common problems include volatile economic environments, weak financial supervision, inadequate legal and accounting frameworks, ineffective payments systems, and insufficient risk management. In many cases there has also been protracted state support to weak state and private banks, together with a lack of effective exit policies.

Because of the high costs involved in bank restructuring, governments are under pressure to keep these to a minimum. This pressure has led to an important change in the way banks approach restructuring. While efforts during the Depression focused on nonmarket instruments, the current strategy uses market-based instruments. This strategy also recognizes the need for continuing financial market liberalization and globalization of banking services. With this in mind, most countries design instruments that will lead to an open, market-oriented, and competitive banking sector.

This paper provides an overview of the major instruments and cost-sharing arrangements that can be used to address systemic banking problems. Country examples illustrate how the design and mix of instruments are aimed at restoring market conditions. Bank restructuring instruments can be grouped into three broad categories: financial instruments that address immediate problems and generally involve a direct financial transfer to banks; operational instruments that deal with governance, individual bank efficiency, and profitability; and structural instruments that focus on restoring open competition and soundness. In the end, on appropriate instrument mix will address immediate as well as underlying structural problems. Sharing the costs of bank restructuring among the state, the bank stakeholders, and to a lesser extent the depositors is also an important general principle of efficient bank restructuring.

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Market-Based Policy Instruments for Systemic Bank Restructuring
Author:
Mr. Tamim Bayoumi
and
Mr. Paul R Masson