Banking Policy and Macroeconomic Stability: An Exploration

Whether and when does banking serve to stabilize the economy? The authors view the banking system as a filter through which foreign and domestic shocks feed through to the domestic economy. The filter can dampen or amplify the shocks through various credit market channels, including credit growth, import of foreign capital, and possibly interest rates. The question is whether the prudential quality of banking, as proxied by measures of regulatory quality and openness to foreign banking, amplify or dampen these shocks. The authors find that many of the regulatory characteristics that have been found to deepen a financial system and make it more robust to crises-notably those which empower the private sector-also appear to reduce the sector's ability to provide short-term insulation to the macro-economy. It is as if prudent bankers are reluctant to absorb short-term risks that, if neglected, might cause solvency and growth problems in the longer run. Forbearance might dampen short-term volatility, but at the expense of the longer run health of the banking sector and the economy. One way to avoid this apparent tradeoff is evident: banking systems which have a higher share of foreign-owned banks, a feature already associated with financial deepening and lowered risk of crisis, also seem to score well in terms of short-term macroeconomic insulation.

Bibliographic Details

Main Authors:	Caprio, Gerard, Jr., Honohan, Patrick
Language:	English en_US
Published:	World Bank, Washington, D.C. 2002-06
Subjects:	ACCOUNTING, ADVERSE CONSEQUENCES, ASSET BUBBLES, BALANCE SHEET, BALANCE SHEETS, BANK CAPITAL, BANK CHARTERS, BANK INSOLVENCY, BANK LENDING, BANK PERFORMANCE, BANK REGULATION, BANK RESERVES, BANKING CRISES, BANKING CRISIS, BANKING SECTOR, BANKING STABILITY, BANKING SYSTEM, BANKING SYSTEMS, BANKING TRANSACTIONS, BANKS, BASLE ACCORD, BONDS, BOOMS, BORROWING, CAPITAL STANDARDS, CAPITALIZATION, CAR, CD, CENTRAL BANK, CENTRAL BANKS, CONSOLIDATION, CORPORATE GOVERNANCE, DEPOSIT INSURANCE, DEPOSITS, DOMESTIC CREDIT, ECONOMIC CONCENTRATION, ECONOMIC RESEARCH, EMERGING MARKETS, EXPECTED VALUES, FACE VALUE, FINANCIAL CRISIS, FINANCIAL DEEPENING, FINANCIAL FRAGILITY, FINANCIAL INSTITUTIONS, FINANCIAL INTERMEDIARY DEVELOPMENT, FINANCIAL MARKETS, FINANCIAL SECTOR, FINANCIAL SECTOR DEVELOPMENT, FINANCIAL SERVICES, FINANCIAL SYSTEMS, FOREIGN ASSETS, FOREIGN BANKS, GLOBALIZATION, GUIDELINES, INCENTIVE EFFECTS, INTEREST RATE, INTEREST RATES, INTERNATIONAL FINANCIAL STATISTICS, LENDING BEHAVIOR, LIQUID ASSETS, LIQUIDITY, LOCAL GOVERNMENTS, MACROECONOMIC PERFORMANCE, MACROECONOMIC STABILITY, MONETARY AUTHORITIES, PORTFOLIO, PRUDENTIAL SUPERVISION, PUBLIC ENTERPRISES, RATING AGENCIES, REAL SECTOR, REGULATORY POWERS, RETAINED EARNINGS, RISK MANAGEMENT, SAVINGS, SHAREHOLDERS, SMALL BUSINESS, TIME DEPOSITS, TRADING, TRANSPARENCY, VALUATION, VOLATILITY BANKING REGULATIONS, ECONOMIC SHOCKS, CREDIT MARKETS, CREDIT EFFECTIVENESS, FOREIGN CAPITAL, PRUDENTIAL REGULATIONS, REGULATORY FRAMEWORK, FINANCIAL CRISES, PRIVATE SECTOR, EMPOWERMENT, SOLVENCY, ECONOMIC GROWTH, FOREIGN OWNERSHIP,
Online Access:	http://documents.worldbank.org/curated/en/2002/06/1942076/banking-policy-macroeconomic-stability-exploration https://hdl.handle.net/10986/14290
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