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

Designating a lead agency improves implementation. Sweden formed a new agency; in Spain and for banks in the United States, the deposit insurance agencies took the lead; in Côte d’Ivoire, external donors played an important role in comanaging the bank-restructuring process.

Firm exit policies are an integral part of best practice; most countries achieving substantial progress closed one or more banks.

accountability and disclosure.

Operational restructuring includes refocusing a bank’s attention on core products; improving its techniques for credit assessment and pricing; strengthening its management practices and accounting systems; and ensuring adequate

A comprehensive strategy for systemic bank restructuring must be designed to improve the finances and operations of individual banks, redress any deficiencies in the operating environment and configuration of the banking system, and restore public confidence.

most often come only from the government or the domestic private sector.6 The government may provide transfers or recapitalize, usually increasing public sector indebtedness. Private sector owners, other banks, bank creditors and depositors, and borrowers may also be obliged to bear the costs by writing down capital or deposits, or by paying wider spreads between deposit and loan rates as banks try to earn their way out, effectively “taxing” customers.

Nevertheless, governments are wary of imposing costs on depositors and other creditors for fear of political repercussions as well as domino effects, disruption of the payments system, or general loss of confidence