IMF Seminars, Conferences, and Workshops

Financial Sector Assessment Program (FSAP)

Reports on the Observance of Standards and Codes (ROSCs)




High-level Seminar:
Assessing Banking Fragility

Washington, DC, May 19–21, 2003
International Monetary Fund
Meeting Halls A and B



The seminar presented an analytical yet practical framework for recognizing banking fragility in developing countries. After a review of both the qualitative and quantitative literature on the origins and early-warning indicators of banking crises, the seminar covered the design of an incentive-compatible official safety net for banks, methods of enhancing market discipline for banks, a risk-based approach to bank examinations, and warning signals from the financial sector. The lessons from county experiences with banking crises were highlighted, and individual country case studies were offered for Argentina and Venezuela. The key elements of FSAPs and ROSCs were discussed, along with use of the Basle Core Principles (of banking supervision) in the field. A panel composed of senior risk analysts from three major rating agencies explained the products and information available to evaluate banking fragility and the approach the rating agencies currently employ to anticipate banking problems. Finally, the seminar closed with a wrap-up of the main conclusions.

Agenda
Monday, May 19

8:30 a.m. –9:30 a.m.

Registration of Country Officials

 

9:30 a.m. –10:00 a.m.

Introductory Remarks
Saleh M. Nsouli (IMF Institute)
Morris Goldstein (Institute for International Economics)

10:00 a.m. –10:30 a.m.

Coffee

 

10:30 a.m. –12:00 noon

Origins and Early Warning Indicators of Banking Crises
Morris Goldstein
After explaining why it is important to uncover banking problems before they erupt into full-blown banking crises, the origins of banking fragility in emerging economies will be discussed. The emphasis is on: high volatility in the operating environment facing banks; lending booms, bursting of asset-price bubbles, and large capital inflows; large currency mismatches by banks and/or their customers; inadequate preparation for financial liberalization; government ownership/involvement of the banking system and high levels of connected lending; weaknesses in the accounting, disclosure, and legal framework; distorted incentives in the official safety net for banks; lack of good internal controls; and small size of banking systems. The newer quantitative literature on early warning indicators of banking crises will also be reviewed and its main findings will be highlighted.

12:00 noon - 2:00 p.m.

Luncheon Speech on Design and Consequences of an Incentive-Compatible Official Safety Net for Banks
(by invitation only)
George Benston (Emory University)
Two aspects of the "official safety net" should be distinguished: help in the form of loans to banks that are experiencing severe liquidity problems ("lender of last resort") and protection of depositors against full or partial loss of their funds ("deposit insurance"). "Incentive incompatibility" (also called "moral hazard") can result when banks are not charged for the full cost of the risks they take, giving them an incentive to take excessive risks that could be costly to the economy. The session will consider the nature of this problem, how it has been dealt with, and how it can be dealt with more effectively.

2:00 p.m. –3:30 p.m.

Enhancing Market Discipline Over Banks
Charles Calomiris (Columbia University)
Banks serve unique economic functions, and those functions are directly related to their inherent vulnerability. But banks today are much more vulnerable than they were in the past, or than they need to be. This presentation begins with a theoretical analysis of the economic role of banks in the economy, and empirical evidence of the relevance of theories that explain the functions, structure, and fragility of banks. The fragility of banks, and the relationship between fragility and bank structure is explored, using both historical and current evidence from a variety of countries' experiences. Bank safety net policies are consideredCboth from an economic and political perspectiveCand various approaches to limiting the costs of providing safety net protection are compared, including Basle risk-based capital standards, narrow banking, and proposals that incorporate market opinions and market discipline into the regulatory process. Bank recapitalization schemes are also considered.

3:30 p.m. –3:45 p.m.

Coffee

 

3:45 p.m. –5:15 p.m.

The Argentine Banking Crisis 2001-2002
Mario Blejer (Bank of England and former Governor of the Central Bank of Argentina)
In March 2001 a prolonged bank run started in Argentina. The run abated only in August 2002 after 16 months. Private sector deposits fell from an equivalent of US$85 billion to about US$15 billion by the end of July 2002. The Argentine crisis is both a bank and a currency crisis. However, while exchange rate uncertainty played a role, the banking crisis was largely caused by sovereign risk. The lecture analyzes in detail the roots of the crisis, its evolution, the policies adopted by the Central Bank to deal with the problem and the initial results

 
Tuesday, May 20

     

9:30 a.m. –11:00 a.m.

Bank Examinations
William Ryback (Federal Reserve Board)
This presentation will focus on the history and evolution of on-site bank examinations to determine the condition of a bank. It will also discuss rating systems and their development to augment communication between supervisors and detect emerging systemic weaknesses in the banking system. The role of auditors in the process will be discussed along with reasons for enhancing an internal process of on-site supervision within the bank supervisory agency. The movement and adoption of a global standard in this area has led to increased opportunities for training and technical assistance and has allowed the emergence of best practices. The presentation will follow developments in this area.

11:00 a.m. –11:15 a.m.

Coffee

 

11:15 a.m. –12:45 p.m.

Early Warnings from the Financial System
John Heimann (Warburg Pincus)
Country officers many times need ways to evaluate the risks of domestic financial systems without being able to analyze data from the supervisory agencies, due to confidentiality provisions. The presentation is aimed at identifying qualitative and quantitative indicators that can be accessed by IMF officers and can give them elements to assess the fragility of financial systems.

2:30 p.m. –3:45 p.m.

Country Experiences with Banking Crises
Stefan Ingves (IMF, Monetary and Financial Systems Department)*
This lecture will discuss the general principles, strategies and techniques for the effective management of systemic crises. The banking strategies used in the Asian crisis of the late 1990s will be compared with the newer strategies adopted in recent banking crises in Latin America. In particular, the new challenges arising in both highly dollarized economies and in highly indebted economies will be highlighted.

3:45 p.m. –4:00 p.m.

Coffee

 

4:00 p.m. –5:00 p.m.

Continuation

 
 
Wednesday, May 21

     

9:30 a.m. –11:00 a.m.

FSAPs, ROSCs, and Use of Basle Core Principles in the Field
V. Sundararajan (IMF, Monetary and Financial Systems Department)*
Laura Ard (World Bank, Banking and Financial Restructuring)
The presentation will focus on: Objectives and scope of Financial Sector Assessment Program (FSAP); Analytical framework of FSAP to assess financial system stability and development needs; Analytical tools of FSAP, which include analysis of financial soundness indicators, stress testing, and standards assessments, including, in particular, Basle Core Principles of Effective Banking Supervision (BCP); and, Role of BCP assessments in FSAP, lessons learned, and next steps.

11:00 a.m. –11:15 a.m.

Coffee

 

11:15 a.m. –12:45 p.m.

Case Study: Venezuela
Ruth de Krivoy (Sintesis Financiera and former Governor, Central Bank of Venezuela)
The Venezuelan banking crisis (1994-1995) was largely rooted in bad regulation and supervision, and bad banking. Macroeconomic shocks, pro-cyclical fiscal and monetary policies, and a poorly sequenced economic reform program contributed to the crisis. The timing is largely explained by political events. The cost of the crisis swelled due to poor crisis management. This presentation will review the lessons that can be drawn with respect to macroeconomic policy, banking regulation and supervision, and crisis management.

12:45 p.m. –2:30 p.m.

Farewell Luncheon
(by invitation only)

 

2:30 p.m. –3:45 p.m.

Credit Rating
Jerome Fons (Moody's Investors Service)
Michael DeStefano (Standard & Poor's)
Glen Grabelsky (Fitch Ratings)

Michael DeStefano
Relationship of Bank and Sovereign Ratings
It is commonly held that there is a strong relationship between the creditworthiness of sovereigns and the banks that operate under their jurisdiction. While Standard & Poor's subscribes to this view, it does so in a qualified way. In the case of highly rated sovereigns, it is still possible to have banks rated substantially lower, while in the case of lower rated sovereigns, it would rarely be the case for banks to be rated higher than the sovereign. The presentation will explore the relationship between sovereign and bank creditworthiness.

Glen Grabelsky
Rating and Analytical Perspectives for Banks and Banking Systems
This presentation will focus on four central points:
1. Earlier banking system crisis and resolutions
2. Economic/banking system/bank profiles prior to crisis
3. Comparison of sovereign/bank/emerging market ratings
4. Ratings movements-Long term, local currency, national, individual
   (a) Using individual and support ratings.

3:45 p.m. –4:00 p.m.

Coffee

 

4:00 p.m. –4:45 p.m.

Continuation

 

4:45 p.m. –5:15 p.m.

Wrap-Up of Seminar's Main Points

Morris Goldstein




* As of 5/1/2003 (formerly Monetary and Exchange Affairs Department)


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