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.

The views expressed in this paper are those of the authors. No responsibility for them should be attributed to the Bank of Canada. iii

of Columbia University or the National Bureau of Economic Research. For well over five years, the Japanese economy has been stagnating and currently it appears to be mired in another recession. What should be done to break the Japanese economy out of its low growth state? What steps do policymakers need to take in order to promote a Japanese recovery? This paper tries to provide answers to these questions by first examining what are the underlying forces that are holding the Japanese economy back. The resulting analysis suggests that increased informational problems in Japanese financial markets are the primary sources of weakness in the Japanese economy. This view has important implications for what steps need to be taken to promote recovery and the final section of the paper outlines an approach to get the Japanese economy back on track.

This paper surveys the existing literature on the determinants of household savings and credit in developing countries and examines the ways in which macro-level policies might impact on household financial behaviour.

norm during the late 1980s and early 1990s. While these "twin crises" have inspired a number of recent theoretical and empirical contributions to the literature on financial crises in developing economies, much less consideration has been given to analytic case studies of actual country experiences with these twin crises and their aftermath. This paper attempts to fill this gap by studying the specific case of Thailand, which was the first domino to fall, triggering the East Asian financial crisis of 1997-98. Emphasis is laid on the issue of post-crisis foreign bank entry into Thailand.

Except where reference is made to the work of others, the work described in this dissertation is my own or was done in collaboration with my advisory committee. This dissertation does not include proprietary or classified information. ___________________________________

The U.S. current account deficit has grown steadily since 1991, hitting record levels of 3.6 percent of GDP in 1999 and 4.4 percent in 2000. In recent years, the growing deficits have increasingly raised concerns. For instance, most economists who took part in a recent Wall Street Journal forecasting survey agreed that the current account deficit is the major threat facing the U.S. economy (Ford). Some policymakers have also suggested that the large and growing U.S. current account deficit may be unsustainable and thus may create problems for the economy. This article examines the causes and consequences of the large current account deficits in the United States. The first section of the article identifies the potential sources of the large deficits. Much of the rise in the current account deficit over the past decade can be attributed to two factors: accelerating U.S. productivity and a surge in household wealth driven by the stock market. The second section examines whether the U.S. current account deficit is sustainable in the near term. In this analysis, an unsustainable deficit is defined as one that triggers a sharp hike in interest rates, a rapid depreciation of the dollar, or some other domestic or global economic disruption. The article concludes that, over the near term, deficits of roughly the current magnitude are sustainable and therefore unlikely to disrupt the U.S. economy. Jill A. Holman is an economist at the Federal Reserve Bank of Kansas City. Steve Lamberty, formerly a research associate at the bank, helped prepare the article. This article is on the bank’s web site at www.kc.frb.org.

credit policy, quantitative easing, credit easing, monetary policy implementation, transmission mechanism, interest rates. BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS. Copies of publications are available from:

Deposit insurance schemes are increasingly being adopted around the world and yet our understanding of their design and consequences is in its infancy. In this paper we provide a new rationale for the provision of deposit insurance based around the idea that bankers have valuable but costly monitoring skills. The banking sector exhibits both adverse selection and moral hazard and so the social bene ts of bank monitoring are shared between depositors and their banks. Therefore too few deposits are made in equilibrium. Deposit insurance can correct this market failure. Contrary to received opinion, we nd that deposit insurance should be funded not by bankers or depositors but through general taxation. We also show that the optimal level of deposit insurance should vary inversely with the quality of the banking system.

Restrictive policies aimed at reducing the likelihood of bank failure during recessions tend to increase the probability of a credit crunch. In this paper we infer governments' responses to this dilemma by studying the cyclical behavior of bank capital in 1330 banks from 28 OECD countries in 1992-98. We find significant differences across countries. In the US and Japan, bank capital is counter-cyclical, that is, the typical bank strengthens its capital base during periods of weak economic activity. In the other countries, there is no relationship between the level of macroeconomic activity and bank capital. From these findings we infer that severe banking crises alert policymakers towards the likelihood of trouble in the banking sector, and that regulatory authorities take measures to prevent this even at the expense of increasing the risk of a credit crunch. In countries without such crisis experience, policymakers seem to be less concerned about bank systemic risk. Our results suggest that the strong push by the US for the Basle Accord may have been a reflection of this increased sensitivity. 2