4

**_Information sources._** Our analysis relies on published reports and World Bank internal documents. We supplement these sources with extensive interviews with country experts familiar with the details of the individual country cases.

> **_Case studies._** We use a case study approach and carry out an analysis that is aimed at

> characterizing the incentive structure under which banks and firms operated - or initial conditions - at the onset of the crisis and five years after the crisis started. While institutional

> changes are not always easy to implement, especially when they need parliamentary approval-

> as in the case of bankruptcy regimes-this period should provide governments in those countries where the incentive framework is not conducive to corporate restructuring with sufficient time to improve the framework.

We proceed by first summarizing the main characteristics of the specific banking crisis - type of distress, size of the nonperforming loans at the peak of the banking crisis and scope of corporate distress to get a better understanding of the type and severity of the banking crises in the sample countries. We continue by analyzing the incentive framework that banks and corporations are subject to at the beginning of the crisis and then examine the changes governments made to the framework five years after the start of the crisis. We focus particularly on four components of the incentive framework that have been found in the literature to be important to encourage banks and corporations to engage in meaningful corporate restructuring: (i) banks' capital positions and therefore their ability to withstand losses; (ii) the accounting and (iii) legal framework in which banks and corporations are operating as it indicates to what extent banks and corporations have (correct) incentives to come to the negotiating table and reach solutions that result in sustainable corporate financing patterns; and (iv) existing ownership links between banks and corporations (Claessens, Klingebiel and Djankov 1999). Extensive ownership links between banks and corporations would weaken either incentives to engage in meaningful corporate restructuring.

**_Evaluating outcomes._** The aim of corporate restructuring is to attain viable financial structures within a reasonable timeframe. Therefore we judge the success or failure of a decentralized restructuring strategy on the financial health of the corporate sector and evaluate to what extent the restructuring has led to financially viable corporate sectors five years after the onset of the crisis.

# B. **Main Characteristics of Banking Crises**

> Figure 1 and Table 1 (below) provide information on the type and scope of distress in the seven country cases. All countries in the sample experienced systemic financial crises, that is, a major part of the banking system of each sample country was affected and its aggregate capital base was exhausted.

The scope of distress in the corporate sector is partly reflected in the share of nonperforming loans (NPLs) at the peak of the crises (Figure 1). The level of non-performing loans can therefore be used as a rough proxy for the extent of corporate distress. Figure 2 indicates that levels of NPLs were significant in all sample countries at the height of the crisis - exceeding 30 percent of banking system assets - with the exception of Norway and Hungary. Argentina's