Banking Crises in Transition Economies : Fiscal Costs and Related Issues
The authors look at strategies for dealing with banking crises in 12 transition economies -- five from Central and Eastern Europe (CEE): Bulgaria, the Czech Republic, Hungary, Macedonia, and Poland; the three Baltic states: Estonia, Latvia, and Lit...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2000/11/717460/banking-crises-transition-economies-fiscal-costs-related-issues http://hdl.handle.net/10986/19751 |
| Summary: | The authors look at strategies for
dealing with banking crises in 12 transition economies --
five from Central and Eastern Europe (CEE): Bulgaria, the
Czech Republic, Hungary, Macedonia, and Poland; the three
Baltic states: Estonia, Latvia, and Lithuania; and four
countries from the Commonwealth of Independent States (CIS):
Georgia, Kazakhstan, the Kyrgyz Republic, and Ukraine. Three
types of strategies were used to deal with the crises. The
CEE countries generally pursued extensive restructuring and
recapitalizing of banks; most CIS countries pursued
large-scale liquidation; and the Baltic states generally
pursued a combination of liquidation and restructuring. The
strategy pursued reflected macroeconomic conditions and the
level of development in a country's banking sector.
There were more new banks in the former Soviet Union
(FSU-the CIS and Baltic states), but they tended to be
small, undercapitalized, and not deeply engaged in financial
intermediation. The CEE countries generally incurred higher
fiscal costs than the FSU countries but ended up with
sounder, more efficient banking systems, with many of the
recapitalized banks being privatized to strategic foreign
investors. The CIS countries pursued a less fiscally costly
approach but have been left with weak banking systems and
low levels of intermediation. The Baltic states appear to
have struck a good balance, incurring modest fiscal costs
while making their systems sounder and more efficient. The
findings suggest the following: a) Operational, financial,
and institutional restructuring should be undertaken in
parallel. b) Financial restructuring should involve adequate
recapitalization to deter moral hazard and repeated
recapitalization. c) Operational restructuring should entail
privatization to core investors (particularly to reputable
foreign banks). d) The enterprise problems underlying
banking problems must also be addressed. e) Fiscal costs
were reduced when governments dealt only with bad debt
inherited from the socialist period; when small banks that
held few deposits were allowed to fail, where the social
costs of such failure were low; and when only banks that got
into trouble because of external shocks were rescued while
those suffering from poor management were liquidated. f) The
government, not the central bank, should undertake bank
restructuring. Central bank refinancing is not transparent
and could lead to hyperinflation. |
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