Banking Crises in Transition Countries: Fiscal Costs and Related Issues
Helena Tang, Edda Zoli and Irina Klytchnikova*
*Tang is a Lead Economist at the World Bank; Zoli is an Economist at the International Monetary Fund; and Klytchnikova is a consultant at the World Bank. The paper benefited from valuable comments from Patrick Honahan, Jo Ann Paulson and Stijn Claessens, although the authors alone are responsible for the contents. The findings, interpretations and conclusions expressed in this paper are entirely those of the authors and do not necessarily represent the view of the World Bank, the International Monetary Fund, their Executive Directors or the countries they represent.
Contents Executive Summary 1. 2. Introduction Banking Crises in Transition Countries 2.1. Banking Sector Conditions 2.2. Episodes of Banking Crises 2.3. Causes of Banking Crises Institutional, Operational and Financial Restructuring of Banks in Transition Countries 3.1 Institutional Restructuring 3.2 Operational Restructuring 3.3 Financial Restructuring Costs of Banking Crises 4.1 Cost of Bank Restructuring for the Government 4.2 Cost of Bank Restructuring for the Central Bank 4.3 Cost of Deposit Compensation for the Government 4.4 Total Fiscal and Quasi-Fiscal Costs of Banking Crises Bad Debt Recovery 5.1 Implications of Choice of Debt Recovery Strategy on Fiscal Costs 5.2 Country Experiences 5.3 Results of Bad Debt Recovery Results of Crisis Resolution Summary, Conclusions and Policy Lessons i 1 2 2 4 10 12 12 15 18 19 21 26 30 34 37 38 38 44 44 47
Executive Summary All transition countries have experienced banking crises or severe banking distress during the transition process. Key factors contributing to banking crises in these countries have been the large amounts of bad debt inherited from the previous socialist regimes, and the lack of familiarity of enterprises and banks with the functioning of market economies. Therefore, the resolution of banking crises in these countries can also be viewed as a challenge of transition, or as a challenge of banking sector development in the transition context. While some transition countries have progressed more than others in developing and strengthening their banking systems, many have not completed the “transition” process. To this extent, new banking crises remain a risk. A pertinent question for policy makers therefore is how to resolve such crises in a way that would minimize the costs to the economy and the risks of such crises recurring in the future. This paper reviews the experience of banking crises during 1990-98 in twelve transition countries: five countries from Central and Eastern Europe (CEEs) – Bulgaria, the Czech Republic, Hungary, Macedonia and Poland; the three Baltic states – Estonia, Latvia and Lithuania; and four countries from the Commonwealth of Independent States (CIS) – Georgia, Kazakhstan, the Kyrgyz Republic and Ukraine. These countries have experienced either episodes of obvious crisis such as bank runs, or episodes of severe banking distress involving a large share of non-performing loans in the banking sector. Both types of episodes are referred to in this paper as banking crisis episodes. The paper reviews the crisis resolution strategies adopted by these twelve countries, and assesses which strategy minimized fiscal costs while at the same time strengthened the banking sector. A strengthened banking sector will be less prone to future crisis, which also helps minimize fiscal costs over the longer term. The crisis resolution strategies pursued by the twelve transition countries fall into three broad categories: (a) extensive restructuring and recapitalization of banks, which was generally pursued by the CEEs; (b) large-scale liquidation of banks pursued by most CIS countries; and (c) a combination of bank liquidation and restructuring, which was generally pursued by the Baltic states. The different strategies...
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