Systemic Bank Restructuring and Macroeconomic Policy

Mass liquidation could result in asset-price deflation, with consequent negative macroeconomic effects.

High unanticipated inflation also has the effect of shrinking liabilities (and financial assets) in real terms. However, this lowers the quality of loans and credit evaluation by distorting enterprises’ balance sheets. These distortions lead banks to overestimate the creditworthiness of their customers, underprovision for losses, and report artificially inflated profits. Negative real interest rates that usually accompany high inflation also discourage deposit growth and cause disintermediation.

Financial restructuring aims at restoring solvency by improving banks’ balance sheets (stock position) and income statements (flow position) to provide an adequate level of capital, a capacity for sustainable earnings, and the flexibility to manage liquidity and control risk exposure