Banking Soundness and Monetary Policy


Charles Enoch, and J. Green
Published Date:
September 1997
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Mr. Škreb wondered whether it would be possible to set uniform standards for bank soundness across countries, given widely differing economic environments. Mr. Kovacs asked about the interlinks between macroeconomic stabilization and banking sector soundness, noting that with a fragile system, macroeconomic stabilization measures could have significantly negative repercussion effects. Mr. Kovacs noted that the 1990–91 Hungarian stabilization resulted in a sharp decline in domestic demand and inflation that led to huge problems in the banking sector which became apparent after the 1992 introduction of a new banking law. In contrast, before the 1995 stabilization program the banking sector had been recapitalized, banking supervision had been improved and the banking sector had been “educated.” In this second round of stabilization, the banking sector did not deteriorate; in fact it appeared that banks had become “too” cautious, lending only to the “first quality” clients. Nana Amma Yeboaa stressed that restructuring might well concern the entire financial sector, rather than only the banking sector. Mr. Iltchev noted that bank restructuring needed to go hand in hand with restructuring of the economy at large. A banking system could only operate if the market itself was efficient. In Bulgaria this was not the case. Insufficient and slow privatization of the enterprise sector had robbed the banks of investment opportunities. Mr. Thahane noted that bank restructuring in many African countries was inhibited by weak legal and regulatory framework, lack of trained personnel, and weak institutions. He suggested that the Internet might help to raise the level of sophistication in the near future.

In response, Mr. Fischer agreed that it was difficult to apply uniform standards across countries. But, notwithstanding large inter-country differences, it should be possible to develop a set of common principles, for instance in the area of accounting. He fully agreed with the need to support bank restructuring with other structural measures, especially also with privatization.

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