9 international best practice significantly<sup>infive(Argentina,Chile,Hungary,Japan and Thailand)</sup> out of seven country cases. Banks<sup>in Argentinaand Thailand operatedundera weak accounting</sup> framework that allowed them to<sup>postponetherecognitionofloan losses andoverstate their</sup> capital positions. Banks in Thailand<sup>hadtoclassifyaloanasnon-performingonlyafterit had</sup> not been serviced for 360 days.<sup>Atthesametime,theywere allowedtoaccrueuncollected</sup> interest income for up to twelve<sup>months (Alba,HemandezandKlingebiel1999).Incontrast,</sup> Norway's and Poland's accounting<sup>frameworkwas significantlybetterin theinitialphaseof the</sup> cnsis.

**_c Legal framework._** The bankruptcy system is crucial<sup>indisciplining borrowersand</sup> forcing them to come to the negotiating<sup>table withgood restructuringproposals.</sup> Table 3 compares important features of<sup>the bankruptcyframework-so-called creditor rights -across the</sup> sample countries. As shown in<sup>Table3,thelegalframeworkin fiveof thesample countries</sup> contains two out of four creditor<sup>rights.Argentinaonly hasonecreditor rightinitslawsand</sup> Thailand affords creditors a relatively<sup>highprotection-on paper,atleast -by having three out</sup> of four creditor rights in its laws.

**Table 3. Legal Framework and the**<sup>**Existenceof Ownership Links**</sup>

|Count|Restrictions for<br>goinginto<br>reorganizations|No<br>automatic<br>stayon<br>assets|Secured<br>creditor<br>paidfirst|Manager does<br>notstayin<br>reoreanization|. Sumof<br>creditor<br>rightsindex|Efficiency<br>ofjudicial<br>system<br>index|Enforcement<br>ofcreditor<br>nigts|Ownership<br>structures|
|---|---|---|---|---|---|---|---|---|
|Argentina|0|0|1|0|1|6.0<br>|0.6<br>|2<br>|
|Chile|1|0|1|0|2|7.2|1.4<br>|1<br>|
|Hungary|I|1|0|0|2|3.0<br>|0.6<br>|1<br>|
|Japan|0|0|1|1|2|8.0|1.6<br>|3<br>|
|Norway|1|0|1|0|2|10.0<br>|2.0<br>|3<br>|
|Poland|1|0|1|0|2|.3.0|0.6<br>|1<br>|
|Thailand|I|I|0|1|3|3.2|0.9|1|

# _Notes:_

_Legalframework._ The score for<sup>thelegalframework is measured as the</sup><sup>_sum_of four indicatorsof creditor rights:(i)restrictionson organizations;</sup> (ii) no automatic stay on assets;<sup>(iii) securedcreditors paidfirst; and (iv) managementdoes notstay inreorganization.AnindicatorisscoredasI</sup> if the particular creditor right is<sup>providedinthecountry'sconmmerciallaws;otherwise,it is scored as zero.Attheoutsetof theirtransition,</sup> Hungary and Poland had to develop<sup>(i)legalframeworksthatwerecompatiblewithlaws inmarket economies;and(ii) judicialinstitutions to</sup> enforce the new laws. Efficiency of<sup>judicialsystem index assessestheefficiency andintegrity of thelegalenvironmentas it affectsbusinesses,</sup> particularly foreign firms. (The<sup>scoringrangesfromIto10.)The enforcementof creditor rightsis calculatedas the productof the creditor rights</sup> and judicial efficiency indices<sup>divided by10.</sup> _Ownership structure_ (Based<sup>on methodologydevelopedby LaPorta, Lopez-de-Silanes,and Shlcifer1999).</sup> 4 = Widely dispersed ownership<sup>(firms do not have any shareholders withvoting rights exceeding20 percent)</sup> 3 - Widely dispersed ownership<sup>andcross-shareholdingsallowed (firms are allowed toownsharesincorporations thatbelong toits chainof</sup> control) 2 - Controlling shareholder<sup>(corporationsinwhichshareholders'voting rightsexceed20 percent)andno cross-shareholdingsin publiclyheld</sup> corporate shareholder I = Controlling shareholder and<sup>at least one publicly tradedcompanyin the chainof control</sup> _Sources:_ La Porta, Lopez-de-Silanes,<sup>andShleifer1998and1999;Claessens,Djankovand Nenova2000; WorldBank1985;Barandiaranand</sup> Luders 2000, Sanhueza 2000b;<sup>Kopanyi2000b;Intemational MonetaryFund1999b; Karlsen2000 and Norway'sMinistry of Finance;authors'</sup> estimates.