## Promoting Safe and Sound Banking Systems: An IMF Perspective -- Address by Michel Camdessus

_IMF News, September 28, 1996_

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**Canonical URL:** [Promoting Safe and Sound Banking Systems: An IMF Perspective -- Address by Michel Camdessus](https://www.imf.org/en/news/articles/2015/09/28/04/53/spmds9617)

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## Bibliographic details
- Published: September 28, 1996

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### Overview
- Remarks by Michel Camdessus, Managing Director of the International Monetary Fund, at the Conference on "Safe and Sound Financial Systems: What Works for Latin America", Inter-American Development Bank, Washington, D.C., September 28, 1996.
- The speech emphasizes the centrality of banking-system soundness for domestic prosperity and global stability and outlines the IMF's perspective on causes, ongoing initiatives, and an agenda for strengthening banking systems.

### Causes of banking sector problems
- Common themes observed through Fund surveillance of 181 member countries:
  - Lax management within individual banks; weak incentives for owners and managers to act prudently.
  - Lack of legal and judicial infrastructure leading to breakdowns in credit discipline.
  - Lack of transparency about banks' operations and financial condition, including insufficiently rigorous loan valuation and provisioning standards.
  - Weak domestic banking supervision due to inadequate laws/regulations, political interference, or insufficient human and financial resources.
  - Government involvement that distorts incentives (channeling support to ailing industries, public bail-out expectations, weak exit policies, over-generous lending of last resort).
  - Greater volatility in economic and financial climates in developing countries (real exchange and interest rates, private capital flows, terms of trade) exposing banks to larger risks without commensurate capital cushions.
  - Financial liberalization/privatization undertaken without simultaneous strengthening of bank and supervisor expertise and resources.
  - Rapid expansion of credit fueled by capital inflows leading to poor credit decisions and loan portfolio problems; these situations require timely monetary and fiscal policy action to prevent deterioration.

### Current initiatives and IMF activities
- National-level reforms:
  - Banking laws updated and supervision upgraded in many countries in Latin America.
  - Examples cited: Chile strengthened banking supervision after its early 1980s crisis; extensive restructurings, mergers, and privatizations in Argentina and, to some extent, Brazil.
- Regional efforts:
  - Adoption of Basle Committee standards and regional supervisory bodies developing additional regional standards (e.g., Association of Bank Supervisory Agencies in Latin America and the Caribbean; Caribbean Supervisors Group).
- IMF role through surveillance, lending, and technical assistance:
  - Surveillance: improving macroeconomic environment and structural framework, more continuous and probing discussions since the Mexican crisis, greater attention to banking sector issues and sustainability of capital flows.
  - Lending and technical assistance: focus on banking legislation, regulation, and supervision; monitoring progress in implementation.
- Acknowledgement that major gaps remain:
  - Persistent national weaknesses: poor internal governance, lack of transparency, inadequate supervision, excessive official complacency.
  - Frequent reactive reforms (post-crisis) rather than preventive measures.
  - International standards not comprehensive enough in areas such as accounting, loan valuation, provisioning rules, and exit policies; lack of consensus among G-10 and EU on some issues.
  - Basle standards may not be well adapted to developing-country circumstances; some Latin American countries have set more demanding capital ratios and risk weights than the Basle Capital Accord suggests.

### Agenda for the future and IMF contributions
- Principal emphasis:
  - Strengthen internal bank governance.
  - Reinforce market discipline in banking practices.
  - Improve external oversight and support until internal governance and market discipline become effective.
- Strategy of disseminating "best practices":
  - Identify standards and practices that have served particular groups of countries well and adapt them to others.
  - Use voluntary international guidelines to incentivize reform via positive market reactions.
- Critical issues to address:
  - Early corrective action against problem banks.
  - Mechanisms to close down insolvent banks.
  - Designing payments systems to limit contagion.
  - Ensuring lender of last resort facilities do not prolong unsound banks' lives or create moral hazard.
- How the Fund stands ready to help:
  - Contribute universal experience to develop internationally agreed standards tailored to developing countries.
  - Help disseminate standards and monitor progress in implementation.
  - Assist in restructuring banking and financial systems.
  - Work in close collaboration with other international, regional, and national organizations.

### Regional cooperation and practical examples
- Cooperative actions with IDB and World Bank cited as sources of encouragement:
  - Venezuela: coordinated technical assistance by IDB, World Bank, and Fund contributed to strengthening banking supervision after the financial sector crisis.
  - Costa Rica and Nicaragua: IDB and Fund cooperation on programs to modernize and restructure state-owned banks.
  - Argentina: cooperation in privatizing a number of provincial banks.
  - Ecuador and Guyana: IMF and IDB assistance with drafting modern banking legislation.
  - Nicaragua: ESAF-supported structural reform and macroeconomic stabilization, reinforced by an IDB technical assistance project to modernize the central bank and develop core financial and economic statistics (Fund serves as executing agent).
- Emphasis on pooling surveillance, financing, and technical assistance resources and drawing on expertise from Basle and the central banking community.

### Key statistics and quantitative findings (preserved as stated)
- Fund surveillance covers 181 member countries.
- More than two-thirds of all Fund members have experienced banking sector problems.
- The crisis in Chile exceeded 30 percent of GDP.
- The recent crisis in Venezuela amounted to 20 percent (context: economic cost).
- Document identifiers and dates preserved: 96/17; September 28, 1996; CORRECTED VERSION.

*Remarks by Michel Camdessus, Managing Director of the International Monetary Fund, at the Conference on "Safe and Sound Financial Systems: What Works for Latin America", Inter-American Development Bank, Washington, D.C., September 28, 1996.*

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## References

- [Argentina and the IMF](http://www.imf.org/external/country/ARG/index.htm)
- [Chile and the IMF](http://www.imf.org/external/country/CHL/index.htm)
- [Costa Rica and the IMF](http://www.imf.org/external/country/CRI/index.htm)
- [Nicaragua and the IMF](http://www.imf.org/external/country/NIC/index.htm)
- [República Bolivariana de Venezuela and the IMF](http://www.imf.org/external/country/VEN/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [Technical Assistance -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-capacity-development)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/spmds9617_