Recapitalizing Banking Systems : Implications for Incentives and Fiscal and Monetary Policy
In the aftermath of a banking crisis, most attention is rightly focused on allocating losses, rebuilding properly managed institutions, and achieving debt recovery. But the authorities' decision to use budgetary funds to help restructure a lar...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
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World Bank, Washington, DC
2013
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| Online Access: | http://documents.worldbank.org/curated/en/2001/02/1000493/recapitalizing-banking-systems-implications-incentives-fiscal-monetary-policy http://hdl.handle.net/10986/15744 |
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okr-10986-157442021-04-23T14:03:19Z Recapitalizing Banking Systems : Implications for Incentives and Fiscal and Monetary Policy Honohan, Patrick BANKING SYSTEMS RECAPITALIZATION INCENTIVES MONETARY POLICY FISCAL POLICY BANK RESTRUCTURING BANK MANAGEMENT FINANCIAL INSTRUMENTS LIQUIDITY ASSET YIELDS NEGOTIABLE INSTRUMENTS DEBT MANAGEMENT BANK LENDING INSTRUMENTS ACCOUNTING ASSET MANAGEMENT ASSET RECOVERY ASSET VALUE ASSETS AUTONOMY BAD DEBT BAD DEBTS BALANCE SHEET BALANCE SHEETS BANK ASSETS BANK CAPITAL BANK DEPOSITS BANK FAILURE BANK INSOLVENCY BANK MANAGEMENT BANK RECAPITALIZATION BANK REGULATION BANK RESTRUCTURING BANKING CRISES BANKING CRISIS BANKING SYSTEM BANKING SYSTEMS BANKS BENCHMARK BOND MARKETS BONDS CAPITAL BUDGETING CAPITAL GAIN CAPITAL MARKETS CAPITAL REQUIREMENT CENTRAL BANK CENTRAL BANK LENDING COUPON BONDS COUPON RATE CURRENCY ASSETS DEBT DEBT STRUCTURE DEPOSIT INSURANCE DEPOSIT PROTECTION DEPOSITORS DEPOSITS DISCOUNT RATE ECONOMETRIC ANALYSIS ECONOMIC VALUE EXPROPRIATION FACE VALUE FAILED BANKS FINANCIAL MARKETS FINANCIAL RESTRUCTURING GOVERNMENT BONDS INFLATION INSOLVENT BANKS INTEREST RATE INTEREST RATES LIQUIDATION LIQUIDITY LOAN LOSS PROVISIONS LOOTING LOSS ALLOCATION MACROECONOMIC STABILITY MARGINAL COST MARKET VALUE MATURITIES MONETARY POLICY MONETARY STABILITY MORAL HAZARD NET LOSSES OPERATING COSTS PAYOUT PORTFOLIO PRESENT VALUE PROFITABILITY PUBLIC FINANCE PUBLIC GOOD RECAPITALIZATION SECURITIES SHAREHOLDERS SINKING FUNDS SOLVENCY RATIOS SUBORDINATED DEBT SUBORDINATED LIABILITIES SUBVENTIONS TAXATION TIER 2 CAPITAL VALUATION WEALTH In the aftermath of a banking crisis, most attention is rightly focused on allocating losses, rebuilding properly managed institutions, and achieving debt recovery. But the authorities' decision to use budgetary funds to help restructure a large failed bank or banking system also has consequences for the incentive structure for the new bank management, for the government's budget, and for monetary stability. These issues tend to be lumped together, but each should be dealt with in a distinctive manner. The author points out, among other things, how apparent conflicts between the goals in each of these areas can be resolved by suitably designing financial instruments and appropriately allocating responsibility between different arms of government. First the government must have a coherent medium-term fiscal strategy that determines broadly how the costs of the crisis will be absorbed. Then the failed bank must be securely reestablished with enough capital and franchise value to move forward as a normal bank. This will typically entail new financial institutions involving the government on both the asset and the liability sides of the bank's balance sheet. The bank should not be left with mismatches of maturity, currency, repricing. Assets that are injected should be bankable and preferably negotiable. The liability structure should give bank insiders the incentive to manage the bank prudently. Financial instruments can be complex and sophisticated but only if the government has the credibility to warrant market confidence that it will deliver on the contracts rather than trying to use its lawmaking powers to renege. Innovative use of segregating sinking funds and "Brady"-type bonds can help where government credibility is weak. Restructuring the bank will alter the size, maturity, and other characteristics of the government's debt. These characteristics should be optimized separately and with the market as a whole, not just the affected banks. 2013-09-09T20:55:39Z 2013-09-09T20:55:39Z 2001-02 http://documents.worldbank.org/curated/en/2001/02/1000493/recapitalizing-banking-systems-implications-incentives-fiscal-monetary-policy http://hdl.handle.net/10986/15744 English en_US Policy Research Working Paper;No. 2540 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research Africa East Asia and Pacific Europe and Central Asia Latin America & Caribbean |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English en_US |
| topic |
BANKING SYSTEMS RECAPITALIZATION INCENTIVES MONETARY POLICY FISCAL POLICY BANK RESTRUCTURING BANK MANAGEMENT FINANCIAL INSTRUMENTS LIQUIDITY ASSET YIELDS NEGOTIABLE INSTRUMENTS DEBT MANAGEMENT BANK LENDING INSTRUMENTS ACCOUNTING ASSET MANAGEMENT ASSET RECOVERY ASSET VALUE ASSETS AUTONOMY BAD DEBT BAD DEBTS BALANCE SHEET BALANCE SHEETS BANK ASSETS BANK CAPITAL BANK DEPOSITS BANK FAILURE BANK INSOLVENCY BANK MANAGEMENT BANK RECAPITALIZATION BANK REGULATION BANK RESTRUCTURING BANKING CRISES BANKING CRISIS BANKING SYSTEM BANKING SYSTEMS BANKS BENCHMARK BOND MARKETS BONDS CAPITAL BUDGETING CAPITAL GAIN CAPITAL MARKETS CAPITAL REQUIREMENT CENTRAL BANK CENTRAL BANK LENDING COUPON BONDS COUPON RATE CURRENCY ASSETS DEBT DEBT STRUCTURE DEPOSIT INSURANCE DEPOSIT PROTECTION DEPOSITORS DEPOSITS DISCOUNT RATE ECONOMETRIC ANALYSIS ECONOMIC VALUE EXPROPRIATION FACE VALUE FAILED BANKS FINANCIAL MARKETS FINANCIAL RESTRUCTURING GOVERNMENT BONDS INFLATION INSOLVENT BANKS INTEREST RATE INTEREST RATES LIQUIDATION LIQUIDITY LOAN LOSS PROVISIONS LOOTING LOSS ALLOCATION MACROECONOMIC STABILITY MARGINAL COST MARKET VALUE MATURITIES MONETARY POLICY MONETARY STABILITY MORAL HAZARD NET LOSSES OPERATING COSTS PAYOUT PORTFOLIO PRESENT VALUE PROFITABILITY PUBLIC FINANCE PUBLIC GOOD RECAPITALIZATION SECURITIES SHAREHOLDERS SINKING FUNDS SOLVENCY RATIOS SUBORDINATED DEBT SUBORDINATED LIABILITIES SUBVENTIONS TAXATION TIER 2 CAPITAL VALUATION WEALTH |
| spellingShingle |
BANKING SYSTEMS RECAPITALIZATION INCENTIVES MONETARY POLICY FISCAL POLICY BANK RESTRUCTURING BANK MANAGEMENT FINANCIAL INSTRUMENTS LIQUIDITY ASSET YIELDS NEGOTIABLE INSTRUMENTS DEBT MANAGEMENT BANK LENDING INSTRUMENTS ACCOUNTING ASSET MANAGEMENT ASSET RECOVERY ASSET VALUE ASSETS AUTONOMY BAD DEBT BAD DEBTS BALANCE SHEET BALANCE SHEETS BANK ASSETS BANK CAPITAL BANK DEPOSITS BANK FAILURE BANK INSOLVENCY BANK MANAGEMENT BANK RECAPITALIZATION BANK REGULATION BANK RESTRUCTURING BANKING CRISES BANKING CRISIS BANKING SYSTEM BANKING SYSTEMS BANKS BENCHMARK BOND MARKETS BONDS CAPITAL BUDGETING CAPITAL GAIN CAPITAL MARKETS CAPITAL REQUIREMENT CENTRAL BANK CENTRAL BANK LENDING COUPON BONDS COUPON RATE CURRENCY ASSETS DEBT DEBT STRUCTURE DEPOSIT INSURANCE DEPOSIT PROTECTION DEPOSITORS DEPOSITS DISCOUNT RATE ECONOMETRIC ANALYSIS ECONOMIC VALUE EXPROPRIATION FACE VALUE FAILED BANKS FINANCIAL MARKETS FINANCIAL RESTRUCTURING GOVERNMENT BONDS INFLATION INSOLVENT BANKS INTEREST RATE INTEREST RATES LIQUIDATION LIQUIDITY LOAN LOSS PROVISIONS LOOTING LOSS ALLOCATION MACROECONOMIC STABILITY MARGINAL COST MARKET VALUE MATURITIES MONETARY POLICY MONETARY STABILITY MORAL HAZARD NET LOSSES OPERATING COSTS PAYOUT PORTFOLIO PRESENT VALUE PROFITABILITY PUBLIC FINANCE PUBLIC GOOD RECAPITALIZATION SECURITIES SHAREHOLDERS SINKING FUNDS SOLVENCY RATIOS SUBORDINATED DEBT SUBORDINATED LIABILITIES SUBVENTIONS TAXATION TIER 2 CAPITAL VALUATION WEALTH Honohan, Patrick Recapitalizing Banking Systems : Implications for Incentives and Fiscal and Monetary Policy |
| geographic_facet |
Africa East Asia and Pacific Europe and Central Asia Latin America & Caribbean |
| relation |
Policy Research Working Paper;No. 2540 |
| description |
In the aftermath of a banking crisis,
most attention is rightly focused on allocating losses,
rebuilding properly managed institutions, and achieving debt
recovery. But the authorities' decision to use
budgetary funds to help restructure a large failed bank or
banking system also has consequences for the incentive
structure for the new bank management, for the
government's budget, and for monetary stability. These
issues tend to be lumped together, but each should be dealt
with in a distinctive manner. The author points out, among
other things, how apparent conflicts between the goals in
each of these areas can be resolved by suitably designing
financial instruments and appropriately allocating
responsibility between different arms of government. First
the government must have a coherent medium-term fiscal
strategy that determines broadly how the costs of the crisis
will be absorbed. Then the failed bank must be securely
reestablished with enough capital and franchise value to
move forward as a normal bank. This will typically entail
new financial institutions involving the government on both
the asset and the liability sides of the bank's balance
sheet. The bank should not be left with mismatches of
maturity, currency, repricing. Assets that are injected
should be bankable and preferably negotiable. The liability
structure should give bank insiders the incentive to manage
the bank prudently. Financial instruments can be complex and
sophisticated but only if the government has the credibility
to warrant market confidence that it will deliver on the
contracts rather than trying to use its lawmaking powers to
renege. Innovative use of segregating sinking funds and
"Brady"-type bonds can help where government
credibility is weak. Restructuring the bank will alter the
size, maturity, and other characteristics of the
government's debt. These characteristics should be
optimized separately and with the market as a whole, not
just the affected banks. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Honohan, Patrick |
| author_facet |
Honohan, Patrick |
| author_sort |
Honohan, Patrick |
| title |
Recapitalizing Banking Systems : Implications for Incentives and Fiscal and Monetary Policy |
| title_short |
Recapitalizing Banking Systems : Implications for Incentives and Fiscal and Monetary Policy |
| title_full |
Recapitalizing Banking Systems : Implications for Incentives and Fiscal and Monetary Policy |
| title_fullStr |
Recapitalizing Banking Systems : Implications for Incentives and Fiscal and Monetary Policy |
| title_full_unstemmed |
Recapitalizing Banking Systems : Implications for Incentives and Fiscal and Monetary Policy |
| title_sort |
recapitalizing banking systems : implications for incentives and fiscal and monetary policy |
| publisher |
World Bank, Washington, DC |
| publishDate |
2013 |
| url |
http://documents.worldbank.org/curated/en/2001/02/1000493/recapitalizing-banking-systems-implications-incentives-fiscal-monetary-policy http://hdl.handle.net/10986/15744 |
| _version_ |
1764429607011876864 |