Financial reform lessons and strategies
The argument in favor of gradual - but
            sustained - financial reform is based on two factors.
            First, the development of borrower net worth will determine
            the health of the real and, ultimately, the financial
            sector.  Thus, speeding up reforms when borrower net worth
            is subject to positive shocks - or slowing them when it is
            subject to negative shocks - appears sensible and appears to
            have worked better in practice.  Second, the initial
            conditions of the banking sector - not just its net worth
            but its stock of human capital, the initial portfolio mix,
            and the internal incentive systems - will also determine the
            success of any reforms.  Thus the speed of financial reform
            must be related to these conditions:  rapid reform with
            unskilled bankers, unbalanced portfolios, and perverse
            "bank cultures" is a sure recipe for financial
            crisis.  Of course, political factors can present unique
            opportunities to point an economy rapidly and permanently
            toward a more market-based system.  And these opportunities
            should be seized.  But where possible, financial reforms
            should consider links to the real sector and institutional
            development.  The case for gradual reforms is not one for
            inaction, as the conclusions of this study suggest that
            financial reform is worth the effort and that, with due
            attention to the institutional environment, the lessons can
            be applied elsewhere. Authorities can do much to increase
            the market orientation of their financial system, with all
            its benefits, even without a big bang.  They can eliminate
            the grossest interest subsidies, move toward market
            financing of government debt, and raise deposit rates at
            least to only slightly negative or modestly positive levels,
            paying attention to budget realities.  In several countries,
            authorities ended modest financial repression early in their
            reform efforts, while still retaining some controls.  Of
            those that moved fastest on interest rate deregulation,
            Indonesia and New Zealand met most of the foregoing
            conditions, with some uncertainty about the health of the
            banks at the point of deregulation.  But in both cases banks
            had a window of a few years before new entry was permitted,
            allowing them time to adjust before competition intensified.
            Caution regarding entry helped to limit the reduction in the
            franchise value of bank licenses, especially given the
            limitations on supervisory skills.  And in both cases,
            deregulation coincided with falling world interest rates.
            Although an eclectic approach to financial reform is more
            difficult to manage than one of immediate, complete
            deregulation, it appears borne out by the country cases and
            the theoretical approaches reviewed here.