Bank Restructuring Research Articles

Financial Market Fragmentation and Reforms in Ghana, Malawi, Nigeria, and Tanzania

This article reports the findings from surveys of formal and informal institutions and their clients in Ghana, Malawi, Nigeria, and Tanzania. It investigates the hypothesis that reforming financially repressive policies would not be sufficient to overcome fragmentation of financial markets because of structural and institutional barriers to interactions across different market segments. The four countries have substantially fragmented financial markets, with weak linkages between formal and informal segments and interest rate differentials that cannot be adequately explained by differences in costs and risks. Nevertheless, the relatively low transaction costs and loan losses of informal institutions indicate that they provide a reasonably efficient solution to information, transaction cost, and enforcement problems that exclude their clients from access to formal banking services. The findings imply that financial liberalization and bank restructuring in the African context should be accompanied by complementary measures to address institutional and structural problems, such as contract enforcement and information availability, and to improve the integration of informal and formal financial markets.

Fiscal Accounting of Bank Restructuring

Current guidelines and practice for classifying government bank assistance operations inadequately capture in the fiscal balance some of the most common, and important, operations. The shortcomings result from the focus on the general government, the exclusion of non-cash operations, and divergences between the timing of cash outlays and the economic impact of assistance operations. Complementing the standard measures of the fiscal balance with an “augmented” balance would provide a definition that is transparent, comprehensive, and reasonably comparable across countries. The augmented balance would explicitly incorporate the major quantifiable fiscal costs of bank assistance operations that are not already included in current definitions of the overall balance.

Bank‐led restructuring in Poland (II): bankruptcy and its alternatives

AbstractPoland's 1993 Enterprise and Bank Restructuring Programme (EBRP) provided for the resolution of problem loans through bank‐led or court‐led workouts, liquidation, or loan sales. This paper examines the workings of three traditional exit processes ‐ court‐led conciliation, bankruptcy, and state enterprise liquidation. Neither bankruptcy nor court conciliation as currently designed gives creditors in Poland enough control over firsm in financial distress. Suggested improvements in design need to be complemented by strong economic policies that give banks and other creditors powerful incentives to use these debt collection mechanisms. The most problematic of the three exit routes is state enterprise liquidation, and although on paper designed for solvent firms, it is often used to get around bankruptcy and keep debtor management in control of assets for as long as possible. Now that the special bank conciliation process has expired as an option, Poland should shift its energies to improving traditional, broadly applicable exit and workout processes.

The Polish Experience with Bank and Enterprise Restructuring

Poland's program tackled simultaneously bank and enterprise restructuring and dealt decisively with the bad debt stock and flow problem with measures to improve incentives and institutional skills. Among transition economies, Poland was a pioneer in bank and enterprise restructuring. The main tool it used to implement the restructuring program was the 1993 law on financial restructuring of enterprises and banks, in an approach that encouraged banks to play a central role in enterprise restructuring. Bank recapitalization was linked to improvements in the banks' operating systems aimed at increasing efficiency and loan recovery. Poland's program to restructure banks and enterprises was successful because it was comprehensive. It tackled banks and enterprises at the same time, dealing both with the bad debt stock problem and the associated flow problem. It made assistance on the stock problem contingent on concrete actions to improve lending practices, with the prospect of possible privatization or liquidation. The lesson Poland's experience offers is that solving the stock problem through bank recapitalization is necessary but not sufficient. Bank recapitalization without measures to improve performance incentives and bank skills is likely to fail. Poland was also realistic about isolating too important to fail enterprises, providing special temporary budget support (after progress in key areas) that gave the program political viability. Poland took steps to modernize bank supervision and adopted measures to privatize banks and set up workout units showing genuine interest in changing banking practices. Poland's banking sector now resembles a modern market economy in structure. Commercial banks have a more than adequate capital base. Banking competition has increased and the sector seems relatively efficient and profitable. The experience of the workout departments has strengthened the skills needed for credit allocation and monitoring. Some positive results in enterprising restructuring have been linked to the banks' central role in enterprise governance, maintaining incentives to avoid unloading debt on the government, resolving conflicts between creditors to avoid triggering unnecessary liquidations, and preventing unnecessary bankruptcies. But it is unclear whether enterprises are on a healthy path or whether a second wave of bad loans may emerge, especially after a downswing in the business cycle. This paper - a product of the Financial Sector Development Department - is based in part on the findings of a broader study for the Operations Evaluation Department.

Macroeconomic Aspects of Systemic Bank Restructuring

Systemic bank problems arise for a large number of causes and in spite of both active banking supervision and market discipline. Once a problem has emerged, swift action is needed to limit further losses, avoid financial destabilization, and regain efficient markets.The restructuring exercise is essentially microeconomic in nature, but has strong links to the development of the whole economy.Particularly important is to improve risk management in banks and support only viable banks with fit and proper governance. Government bank support is ultimately constrained by the need to safeguard government creditworthiness, and bank creditors may therefore have to carry substantial parts of the loss.Monetary policy should aim for a low and stable rate of inflation without sudden changes in interest or exchange rates, but lending of last resort should remain available at government risk.Bank restructuring is complicated by the need to simultaneously restructure important bank customers. Key words: banking crisis, bank restructuring, financial stability, government support, macro-economic policy

Authorities` Roles and Organizational Issues in Systemic Bank Restructuring

Systemic bank restructuring must be the responsibility of one government authority only, with other authorities providing support and analytical help. The restructuring authority, whose tasks are enumerated and discussed, should preferably be a separate and temporary agency reporting to the finance ministry. Other solutions are possible but not recommended. Parliament should be involved in setting priorities and supervising the process, but political interference in restructuring operations should be avoided. Practical issues to consider include ensuring efficient cooperation between authorities; the arrangement of problem asset workout and recovery; and restructuring of politically sensitive enterprises.

Lessons from Systemic Bank Restructuring: A Survey of 24 Countries

In recent decades, a wide range of countries have experienced banking problems. Their approaches to systemic bank restructuring have varied substantially. This paper analyzes a representative sample of 24 countries and provides a summary of policies judged to be successful. The sample countries were ranked by relative progress in resolving banking sector problems. Based on this ranking, the paper examines the effectiveness of institutional and regulatory measures, assesses the impact of accompanying macroeconomic policies, and examines the extent to which particular restructuring instruments contributed to success. Special emphasis is given to the role of the central bank.

Lessons From Systemic Bank Restructuring: A Survey of 24 Countries

In recent decades, a wide range of countries have experienced banking problems. Their approaches to systemic bank restructuring have varied substantially. This paper analyzes a representative sample of 24 countries and provides a summary of policies judged to be successful. The sample countries were ranked by relative progress in resolving banking sector problems. Based on this ranking, the paper examines the effectiveness of institutional and regulatory measures, assesses the impact of accompanying macroeconomic policies, and examines the extent to which particular restructuring instruments contributed to success. Special emphasis is given to the role of the central bank.

Authorities' Roles and Organizational Issues in Systemic Bank Restructuring

Systemic bank restructuring must be the responsibility of one government authority only, with other authorities providing support and analytical help. The restructuring authority, whose tasks are enumerated and discussed, should preferably be a separate and temporary agency reporting to the finance ministry. Other solutions are possible but not recommended. Parliament should be involved in setting priorities and supervising the process, but political interference in restructuring operations should be avoided. Practical issues to consider include ensuring efficient cooperation between authorities; the arrangement of problem asset workout and recovery; and restructuring of politically sensitive enterprises.

Fiscal Aspects of Bank Restructuring

Fiscal Aspects of Bank Restructuring

Fiscal Aspects of Bank Restructuring

Governments frequently assist troubled banks. This paper examines the fiscal aspects of such assistance: rationale, design criteria, methods, and macroeconomic implications. It concludes that (1) banks should be assisted only when there is a clear systemic risk; (2) assistance should be tied to a comprehensive restructuring program, minimize fiscal cost, be equitable and transparent, prevent recurrence, and facilitate a sound macroeconomic environment; (3) debt-based assistance will worsen public sector debt sustainability and will probably increase aggregate demand; and (4) assistance may require a substantial fiscal response (especially given the possible need for a looser monetary stance), which should feed iteratively into the choice of restructuring strategy.

Bank‐led restructuring in Poland: the conciliation process in action1

AbstractPoland's 1993 Enterprise and Bank Restructuring Programme (EBRP) tried to force state‐owned commercial banks to build institutional capacity and resolve their problem loans. The outcome of its innovative bank‐led workout (‘conciliation’) process, documented in this study of 62 firms, is decidedly mixed. The EBRP forced banks to confront their problems, helped them to build instituional capacity in their workout units, and furthered the difficult task of weeding out and closing clearly unviable firms. Yet it had limited power to promote needed restructuring or privatization in firms. The conciliation agreements were relatively unsophisticated and include few tangible requirements for operational or management change. The first two years of implementation saw a slowdown (over earlier years) in the rate of layoffs, a decline in average operating profitablility, and very little real privatization. The main impact of conciliation appears to have been to reduce debt service and thereby give firms ‘breathing room’.

The Role of the Prudential Supervision and Financial Restructuring of Banks During Transition to Indirect Instruments of Monetary Control

This paper proposes a stylized sequencing of banking supervision and bank restructuring measures designed to complement and expedite the adoption of indirect instruments of monetary policy. Appropriate sequencing reflects both operational considerations and macroeconomic effects of structural measures. It typically involves implementing initially a critical mass of reforms of prudential supervision and of financial structure of both banks and enterprises, and subsequently adapting and refining these measures in line with the evolution of markets and internal governance. This approach facilitates implementation because the initial cost of bank restructuring can be offset, partly, through the budgetary effects of improved enterprise finances.

The Role of Prudential Supervision and Financial Restructuring of Banks During Transition to Indirect Instruments of Monetary Control

This paper proposes a stylized sequencing of banking supervision and bank restructuring measures designed to complement and expedite the adoption of indirect instruments of monetary policy. Appropriate sequencing reflects both operational considerations and macroeconomic effects of structural measures. It typically involves implementing initially a critical mass of reforms of prudential supervision and of financial structure of both banks and enterprises, and subsequently adapting and refining these measures in line with the evolution of markets and internal governance. This approach facilitates implementation because the initial cost of bank restructuring can be offset, partly, through the budgetary effects of improved enterprise finances.

Lessons from Bank and Enterprise Restructuring in the Transition Economies of Europe and Central Asia

Lessons from Bank and Enterprise Restructuring in the Transition Economies of Europe and Central Asia

Bank Restructuring and Soft Budget Constraints in Financial Transition

This paper analyzes in a formal model the problem of achieving financial discipline in a transitional economy with bank-intermediated finance. Even if banks have no intrinsic interest in refinancing unprofitable firms, they may still exploit the softness of government. By gambling for government bailouts, banks contribute to softening the budget constraints of enterprises. We show that the poor quality of loan portfolio, the absence of collateral, and low bank capitalization are key elements explaining soft budget constraints and repeated bank bailouts in transitional economies. Bank reserves help in hardening budget constraints, but high initial levels of capitalization are necessary to mitigate potential negative effects of a credit crunch for enterprises. We demonstrate that the trade-off between hardness and enterprise liquidity is more severe when loan portfolios are of poor quality. A similar trade-off arises if a bank invests in screening or monitoring projects to improve the quality of portfolios. Under certain conditions, the government should make capitalization contingent on banks investing in monitoring and screening in order to obtain hard budget constraints rather than to let banks use reserves for such investments. We further show that transfers of all nonperforming loans to a separate institution, a hospital agency, is never optimal, whereas partial transfers may serve to harden budget constraints. J. Japan. Int. Econ., December 1995, 9(4), pp. 354–375. ECARE, Université Libre de Bruxelles, Brussels, Belgium.

Financial policies in socialist countries in transition

One legacy of central planning, says the author, is that the financial systems in the transitional economies are even less developed than in many developing countries. He contends that the main goal of financial reform in these economies should be to make passive financial systems active - to make financial systems participate actively in the economy, as they do in market economies. For this to happen, the transitional economies must develop banking systems that allocate credit efficiently. Commercial banks must screen borrowers and monitor and discipline enterprises. The role of the government or the central bank should be limited to regulation and supervision. Most transitional economies have adopted a gradual approach to reforming their financial systems, maintaining the banking system's passive role. But banking reform in Eastern Europe cannot wait for enterprise restructuring and privatization, because both banks and state enterprises are burdened with inherited bad debts that endanger their solvency and hence that of the economy. The financial restructuring of banks and enterprises should be undertaken simultaneously, says the author, and should start early in the transition. Commercial banks should play an active role in the financial restructuring of enterprises. Governments must take responsibility (through the budget) for the debts of nonviable enterprises in a transparent manner and for the recapitalization of banks after their clean-up. Otherwise the healthy segments of the commercial sectors will have to carry the burden of financial restructuring, which will slow down the transition. Early in the transition, attention must also be paid to improving the system of payments, demonopolizing banking, changing the structure of ownership (including privatization), and introducing market-based financial legislation. The speed of financial reform will depend greatly on the availability of skilled banking professionals, on access to technical assistance from abroad, fiscal constraints, and of course on specific country circumstances. For example, for most countries of the former Soviet Union - except, for the Baltic states - a prerequisite to successful financial restructuring is macroeconomic stabilization and the reduction of high inflation rates. The most important lesson from countries further along in reform is that financial reform should not be delayed but should start as soon as possible. Delays reduce living standards (burdening the healthy parts of the economy with direct taxes or high financial costs), discourage small-scale entrepreneurs, inhibit the entry of new forms, and cause the economy to stagnate further.

The political economy of monetary policy

Understanding the political economy of monetary policy has progressed in recent years because of advances in three areas: the application of rational expectations perspectives to monetary policy, the extension of the economic theory of bureaucracy and public choice insights to monetary policy institutions, and statistical research regarding political influences on monetary policy and related inflation performance. This paper first discusses how Keynesian, game theoretic and partisan modeling of monetary policy have actually inhibited a realistic political economy understanding. It then reviews developments in each of the three areas of progress. It also shows how these recent advances provide insights into the costs of monetary policy as well as into the economics of optimal monetary reform — specifically, the optimal restructuring of central banks.

Financial restructuring of banks and enterprises in Poland

Financial restructuring of banks and enterprises in Poland

Environment, Technology, and Organisation: The Restructuring of the Australian Trading Banks

In this paper, the changing distribution is reviewed of Australian trading bank activities within the business organisations framework currently being developed in geography. Forces of environment and technology are envisaged as acting upon and reacting to the structure and operation of individual banking organisations, with these sets of forces themselves emanating from a constellation of competing controlling and complementary organisations. Major shifts in technology, environment, and organisational structure are identified, leading to major actual and potential changes in Australian trading banks' branch networks.