Healthy Banks Are Vital for a Strong Economy
| Author | Samir El-Khouri |
| Position | IMF Institute |
| Pages | 1-3 |
Page 1
Banking crises have become the "issue du jour," said IMF First Deputy Managing Director Stanley Fischer, moderator of a recent IMF-sponsored roundtable on experiences in dealing with banking crises. The number of countries experiencing significant banking problems has increased substantially in recent years- hitting industrial and developing countries alike-and the high costs and macroeconomic disruptions caused by banking crises have become a matter of increasing concern to the international financial community.
Covering the theoretical and the practical, roundtable participants- including IMF staff and senior officials from member country financial institutions-discussed both general and country-specific experiences. Although these experiences differed according to each country's circumstances, participants generally agreed that a sound banking system was necessary to support effective macroeconomic policy; and that, in most cases, it was costly and counterproductive to keep unhealthy banks alive through artificial resuscitation.
One of the most important conditions for avoiding serious banking crises is the pursuit of stable macroeconomic policies, according to Michael Mussa, Director of the IMF's Research Department. Nonetheless, principles of sound banking and effective regulation and supervision are vital to limit the adverse impact of macroeconomic disturbances.
The fragility of banking systems also constrains the conduct of macroeconomic policy. Banking problems in the United States and Japan in the 1990s hampered the efforts of these countries to recover from recession. Similarly, during the European exchange rate mechanism crisis of 1992, the United Kingdom was constrained by problems in its banking system. Banking problems imposed costs and constraints on the macroeconomy and the conduct of macroeconomic policy in both industrial and many developing and emerging economies. One of the common themes underlying the cause of banking difficulties in many countries related to the "boom and bust" cycles, according to Mussa. Under boom conditions, banks often extended risky loans that turned sour when the bust occurred. An important aspect of sound regulation was to allow the discipline of the market to operate, to ensure that unsound banks fail and their managements are fired.
As the center of the financial system, the central bank faces both a short-term and a medium-term challenge in a financial crisis, according to Manuel Guitián, Director of the IMF's Monetary and Exchange Affairs Department. In the short term, the central bank may need to act as a lender...
To continue reading
Request your trial