Bank Restructuring Strategy Should Be Linked To Macroeconomic Policy

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Systemic bank restructuring is a multiyear process that typically encompasses an array of microeconomic, institutional, and regulatory measures. According to an internal IMF study, such programs have significant macroeconomic implications, not least because their fiscal costs are usually substantial. They also have significant implications for macroeconomic stability, as well as for monetary policy; the balance of payments; economic growth; the equity, efficiency, and transparency of public policy; and for the future functioning of financial markets. Over the last 15 years, more than thirty IMF member countries have undertaken systemic bank restructuring programs in response to banking crises and financial sector distress. The IMF study analyzes the elements of a successful restructuring strategy, based on the experiences of 24 of these countries

In cases of banking crises or financial distress, the problems first need to be assessed, key decisions about who will bear the losses made, and institutional responsibility assigned. As soon as systemic banking problems are recognized, comprehensive policies should be implemented to prevent further deterioration, minimize the cost of restructuring, and reduce the likelihood of a liquidity crisis.

Building a Strategy

A successful restructuring-that is, one that does not need to be repeated-requires not only financial restructuring but also operational restructuring of individual banks.

Assessment. To formulate a workable strategy and determine the instruments for achieving its goals, the authorities should assess both the financial and operational condition of individual banks and the problems of the overall banking system. The assessment should distinguish potentially viable banks that merit restructuring from nonviable banks that will have to be closed. An important lesson from the restructuring experience of several IMF member countries is that firm exit policies are an integral part of a successful strategy. Allocating Losses. The losses of insolvent banks have already occurred by the time restructuring begins and should be distributed as transparently and as equitably as possible. Losses should first be charged against owners' capital to reinforce market incentives for remaining and future bank owners. Owners unwilling to put in additional capital to resuscitate an insolvent institution should be required to relinquish control to supervisors or liquidators.

Governments are generally excessively wary of imposing costs on depositors and other creditors for fear of political repercussions, disruption of the payments system, or general loss of...