Obstacles to Crisis Resolution. Excerpts from the Paper ‘Clearing the Decks’

Abstract

When a bank is insolvent, it should be recapitalized by the previous owners or new partners, or it should be closed unless the authorities decide that it is viable or that closure could trigger a wider crisis. Many governments adopt a general policy of never closing any banks. This may be utterly wrongheaded, but no matter, they adopt the policy anyway. In other cases, banks are neither closed nor effectively restructured, but rather because of the many obstacles in the way of resolution than any general policy.

Even where strong bank supervision and a sound institutional framework exist, the resolution of insolvent banks may meet many obstacles.

A. de Juan

Fear of moral hazard can be paralyzing and must be moderated. It is not inevitable and it can sometimes be the lesser evil.

A. de Juan

Excerpt from the paper Clearing the Decks, delivered at the World Bank’s fourth annual Banking Conference on Development in Latin America and the Caribbean, held in El Salvador in June 1998. The Conference was attended by Joseph Stigliz, who has since been awarded the Nobel Prize, and Stefan Ingves, the current Governor of the Central Bank of Sweden and Chairman of the Basel Committee.