Financial Policies and the Prevention of Financial Crises in Emerging Market Economies
The author defines a financial crisis as a disruption in financial markets in which adverse selection and moral hazard problems become much worse, so that financial markets are unable to efficiently channel funds to those who have the most producti...
| Main Author: | |
|---|---|
| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
|
| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2001/10/1614834/financial-policies-prevention-financial-crises-emerging-market-economies http://hdl.handle.net/10986/19532 |
| Summary: | The author defines a financial crisis as
a disruption in financial markets in which adverse selection
and moral hazard problems become much worse, so that
financial markets are unable to efficiently channel funds to
those who have the most productive investment opportunities.
As financial markets become unable to function efficiently,
economic activity sharply contracts. Factors that promote
financial crises include, mainly, a deterioration in
financial sector balance sheets, increases in interest rates
and in uncertainty, and deterioration in nonfinancial
balance sheets because of changes in asset prices. Financial
policies in 12 areas could help make financial crises less
likely in emerging market economies, says the author. He
discusses: Prudential supervision. Accounting and disclosure
requirements. Legal and judicial systems. Market-based
discipline. Entry of foreign banks. Capital controls.
Reduction of the role of state-owned financial institutions.
Restrictions on foreign-dominated debt. The elimination of
too-big-to-fail practices in the corporate sector. The
proper sequencing of financial liberalization. Monetary
policy and price stability. Exchange rate regimes and
foreign exchange reserves. If the political will to adopt
sound policies in these areas grows in emerging market
economies, their financial systems should become healthier,
with substantial gains both from greater economic growth and
smaller economic fluctuations. |
|---|