policy options

The main motivation for prudential regulation is to increase the solvency of the banking sector. However, it is usually understood that tighter regulation also leads to more concentration and higher spreads. Thus, these prudential measures are seen as implying a trade-off between solvency and competition. In this paper we argue that this trade-off does not necessarily exist. We present a model in which tighter capital requirements lead banks to choose a lower degree of product differentiation, potentially inducing more intense competition and lower spreads. The model is motivated by the recent evolution of the Argentine banking sector. q 2000 Elsevier Science B.V. All rights reserved.

Since 1995 two Spanish banks---Banco Santander Central Hispano and Banco Bilbao Vizcaya---have become the largest foreign banks in retail banking in Latin America. This recent development merits careful analysis because foreign direct investment is rare in retail banking. We find that the Spanish banks are exhibiting asset-seeking, assetexploiting, and oligopolistic behaviors, thus posing no serious challenge to established theories of foreign investment. We discuss the implications for research on cross-border banking. Introduction In a review of the literature on cross-border banking, Tschoegl (1987) concluded that retail banking does not generally lend itself to foreign direct investment (FDI). Retail banking is a mature industry and there is no reason to expect foreign banks to have any particular advantage over domestic banks familiar with their local environment. Historically, only Citibank (now Citigroup) has pursued a global retail strategy, though it has focused on credit car...

This paper empirically investigates the linkages between banking crises and exchange rate regimes, using a comprehensive dataset including 95 developed and developing countries over the last two decades. In particular, the paper examines whether the likelihood, cost, and duration of banking crises are affected by the exchange rate regime in place. Empirical results indicate that adopting a fixed exchange rate diminishes the likelihood of a banking crisis. However, once the crisis occurs, the costs associated with it appear to be larger in countries with fixed exchange rates. The duration of crises, on the other hand, does not seem to be affected by the exchange rate policy.

The causes of systemic bank distress are complex and multi-dimensional involving economic, financial, regulatory and structural weaknesses. This also means that regulatory approaches also need to be multi-dimensional. The paper suggests that an optimum "regulatory regime " needs to incorporate seven key components: regulation (the rules imposed by official agencies), official supervision, incentive structures within banks, market discipline, intervention arrangements in the event of distress, corporate governance arrangements with banks, and the accountability of regulatory agencies. All are necessary but none alone are sufficient for systemic stability. As there are trade-offs between the components, regulatory strategy needs to focus on the overall impact of the regime rather than only the regulation component.

This paper was prepared for the Federal Reserve Bank of Chicago/International

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We analyze banking crises using a panel of macroeconomic and financial data for more than one hundred developing countries from 1975 through 1992. We find that banking crises in emerging markets are strongly associated with adverse external conditions. In particular, high Northern interest rates are strongly associated with the onset of banking crises in developing countries, even after taking into account a host of internal macroeconomic factors.

The 1990s have witnessed a surge in private capital flows to developing countries---and a surge in financial crises. The most severe and regionally extensive has (to date) been East Asia's. The last six years has produced a wealth of research that now allows us to abstract policy lessons from the East Asian crisis and the difficulties in implementing them. These lessons span crisis prevention, management and resolution, and building a new international financial architecture with a regional focus. Progress in these areas would have helped prevent, or at least minimize, both the East Asian crisis and more recent crises.

Abstract: The global financial unrest over the last decade has shifted the attention of banking regulators (Basel II, 2001) in estimating default probabilities for a variety of borrowers. Within a binary choice panel data framework, the current study analyzes various models and cross-examines their performance in identifying financial crises in emerging markets. Using financial ratios, macroeconomic variables, and international factors, the paper identifies a set of warning indicators and discriminates among the three estimators employed. The most important determinants of commercial/official arrears and reschedulings are the debt-to-GDP ratio, inflation, trade liberalization, and the variability of GNP per capita growth. In addition to that, changes in financial flows from foreign investors do affect default frequencies, while external developments are found to be insignificant. Cross-modeling comparison indicates the presence of different exogenous risk factors, depending on the approach employed. Further analysis indicates the presence of heterogeneity, but pertinent estimators fail to perform well. Unlike the fixed- and random-effects estimators, the pooled-logit model yields the minimum number of misclassifications. When past credit performance is taken into account, the significance of some signals is reduced, but the model’s misclassification performance is markedly enhanced.