Bad Banks Research Articles

An Alternative View on Regulatory Distortions in a Competitive Financial Services Industry

We present an alternative view on regulatory distortions in the banking industry. We use the duopoly model developed by Boot, Dezelan, and Milbourn (BDM, 2000), where a bank with low monitoring costs faces a bank with high monitoring costs. We show that when the initial level of the capital requirement is low, an increase of the minimum ratio between capital and total assets causes a higher decrease in profits at the bad bank than at the good bank. This finding contrasts with BDM's theorem 1, which predicts that a regulation imposing an identical increase in production costs on both banks will cause a greater loss in profits at the good bank than at the bad bank. We also look at the impact of an increase in the minimum ratio between capital and total assets on the profits of a representative bank in three other competitive environments identified in BDM. We find that the decrease in the representative bank's profit caused by an increase in the capital requirement is larger when the bank faces competition from an unregulated firm than when it faces a regulated competitor or no competitor at all. This result is consistent with BDM's theorem 2.

China’s Entrance to the WTO and Financial Reform

The openness and liberalization of China's financial market is expected to accelerate with her entrance to the WTO. China plans to carry out liberalization measures, including the expansion of the Renminbi business scope. Openness and liberalization will expedite the integration of internal and external sectors, thereby making the domestic financial market more vulnerable to environmental changes. Consequently, China should establish a strong financial system to efficiently cope with the contagion effects of an external financial crisis. However, China's financial system is still very weak, mainly due to the enormous bad loans to SOEs (state-owned enterprises). Accordingly, the Chinese government should carry out financial reform measures such as strengthening the financial supervision system, dealing with bad bank loans and restructuring the financial institutions. On the whole, China's entrance to the WTO is expected to have a positive influence on her financial sector by accelerating such reform policies as financial reform and SOE reform. Entrance to the WTO will make society recognize the necessity of reform and openness. The Chinese government can decide to push some difficult reform policies which would not have been considered without WTO entrance.

Bad banking in Thailand? An empirical analysis of macro indicators

It appears to be common wisdom that the basic cause of Thailand's crisis is its extraordinarily weak financial institutions. The article questions this proposition from an empirical viewpoint. It is well established that the long‐term performance of Thailand's financial system is favourable. The insight from moral hazard indicators is unexpected regarding the bad banking proposition, although not compelling. Finally, the liberalisation process produced inadequately addressed risks. However, this also applies to experienced and well‐regulated foreign banks. It is argued that the facts provided can be better explained in a framework of system change than by bad banking in Thailand.

Banking Sector Problems: Causes, resolutions and consequences

Until the mid 1980s, commercial banking was the main lever of soft budgetary constraint. Commercial banks were under the control of their founding enterprises and their basic function was to approve the cheapest possible credit to their founders. The process of reforming commercial banking began during the last ten to twelve years. Since then, new laws and other regulations have been passed that are suitable for a market economy. In late 1991, a so-called linear rehabilitation of the banks began in which the majority of bad credits by banks were written off. The linear rehabilitation of the banks did not contain measures that would lead to changes in bank operations. Banks continued to approve credit to “their” enterprises. Therefore, in 1996 the government was forced to rehabilitate three large banks. These rehabilitations were conducted in a serious manner and were based on the transfer of bad bank credits to a special agency, recapitalization, replacing shareholders and replacing bank management. After these rehabilitations, there was a large drop in the interest rate. In 1998, there was a new bank crisis that chiefly affected new banks, which had highly aggressive interest rate policies. The fundamental cause of the new bank crisis was the inappropriate credit policies of these banks, exacerbated by various external shocks. The central bank began to intervene very quickly but only after the bank crisis occurred. Although many banks failed, it is not possible to speak about the end of the banking crisis. There are still many internal weaknesses in bank operations entwined with currency and credit risks, bank investment in enterprise shares, the maturity-gapping of assets and liabilities and the discrepancy between the information about banks and the possibilities for complying with regulations. These internal bank weaknesses open the possibility for similar banking problems in the future, which should be eliminated on time. The fiscal expenditures incurred to date for the rehabilitation of banks can be estimated in the amount of 31 percent of GDP, placing Croatian among the countries with the highest expenditures for bank rehabilitation.

Bad Banking in Thailand? An Empirical Analysis of Macro Indicators

It appears to be common wisdom that the basic cause of Thailand's crisis is its extraordinarily weak financial institutions. The paper questions this proposition from an empirical viewpoint. It is well established that the long-term performance of Thailand's financial system is favorable. The insight from moral hazard indicators is unexpected regarding the bad banking proposition, although not compelling. Finally, the liberalization process produced inadequately addressed risks. However, this also applies to experienced and well-regulated foreign banks. It is argued that the facts provided can be better explained in a framework of system change than by bad banking in Thailand.

From East Asian Miracle to Debacle: Bad Banking and Moral Hazard

This paper by Vivek Moorthy evaluates the policy choices and factors that have contributed to the Asian crisis. It is argued that the interaction between rela - tively closed and weak banking systems and liberalized financial flows played a major role in the crisis. Data on capital flows to Taiwan suggest that the prospect of an IMF bailout is likely to have induced risky private capital flows to East Asia. The appropriate policy response is not to impose sweeping controls⁄ as is often being recommended, but to partially restrict capital inflows while simultaneously free up limited outflows, and also expose the banking and financial services sector to more external competition.

Le cycle global de l'immobilier, 1985-1994 : ses causes et ses leçons

The 1985-1994 global real estate cycle : its causes and consequences The rapid emergence of a global financial system in the late 1980s working together with financial liberalization and deregulation was signaled in the real estate sector of most OECD countries, and some middle-income NIE countries, by unusually strong booms followed by exceptionnaly sharp and protracted real estate busts. What were the international and domestic forces behind these synchronous cycles ? These very strong real estates cycles reflected important structural and macro-economic changes. They have had a triple impact on the real estate industry itself, on the banking system that financed it, and often on the more heavily indebted household sector. We can draw useful lessons by probing the unappealing trilogy of « bad policy, bad banking, and bad luck ». After an examination of the causes of the global cycle, this paper gives special attention to the lessons for the banking sector.

Finnish Banks' Problem Assets: Result of Unfortunate Asset Structure of Too Rapid Growth?

The paper focuses on the proximate causes of the Finnish savings and cooperative banks' non-performing assets in the current crisis.Specifically, the effects of the lending structure at the outset of the crisis and the rate of growth of lending in the latter half of the 1980s are investigated.The main findings are: (1) Lending structure alone is not sufficient to explain the variation in the share of non-performing assets among the local banks.(2) Growth of lending is a major explanatory factor: the faster the growth in the second half of the 1980s, the higher the later share of non-performing assets.(3) Growth of lending is a particularly important cause in the case of the savings banks, where lending structure does not seem to have had much of an impact.(4) Lending to manufacturing, construction and trade has had a significant negative effect on the cooperative banks' asset quality.(5) Differences in the rate of lending growth go a long way in explaining why there are on average much more problem loans in the savings bank group than in the cooperative bank group.(6) The share of foreign currency loans is not an important factor when the effect of growth is accounted for, although the roles cannot be fully separated due to multicollinearity.(7) Assuming that growth of lending is more under the control of a bank than the structure of lending, the findings support the view that bad luck is not the only explanation of the Finnish problems but bad banking in the form of either ignorance of risks or deliberate risk taking is a major factor as well.

Stabilization of bad banks of railway track line by lime slurry pressure injection technique : Bhattacharya, P; Bhattacharya, A Proc Indian Geotechnical Conference, 1989, Geotechniques of Problematic Soils and Rocks, Visakhapatnam, 14–16 December 1989V1, P315–319. Publ New Delhi: Sarita Prakashan, 1989

Stabilization of bad banks of railway track line by lime slurry pressure injection technique : Bhattacharya, P; Bhattacharya, A Proc Indian Geotechnical Conference, 1989, Geotechniques of Problematic Soils and Rocks, Visakhapatnam, 14–16 December 1989V1, P315–319. Publ New Delhi: Sarita Prakashan, 1989