View article

Managing a banking crisis is one of the most difficult tasks to confront a policymaker. Often measures must be decided quickly, sometimes in the eye of a crisis. Almost inevitably, decisions will be guided by imperfect information. This is an intrinsic problem because the very business of banking is built on the possession of information not available to others. Moreover, the various actors may well have an incentive to distort the facts. Because banks lie at the centre of modern economies, policies can have far-reaching implications, political as well as economic. This is particularly true at the present time when so many emerging market economies are simultaneously grappling with banking crises. These issues were discussed by a small group of senior central bankers at the BIS in December 1998. Two days of discussion highlighted the extent of the challenges and the diversity of approaches to the problems. The country papers that follow highlight the main experiences of specific economies. This paper provides an overview of the main issues.

The paper begins by sketching the structure and recent performance of the banking systems in 23 emerging economies, reviewing the scale of the problems faced and some of the causes. Establishing the true magnitude of the likely losses from bad loans is far from straightforward. This is partly because eventual losses depend significantly on collateral and corporate bankruptcy arrangements. Bank restructuring often has