The banking sector in emerging market countries also tends to be more concentrated and represents a larger share of the domestic financial system, suggesting that problems there will have an amplified effect on the economy and on the fiscal costs associated with bank rescues. Causes of banking system problems Banking system crises have many and complex causes, both macro and microeconomic. Macroeconomic causes include exogenous shocks, sustained or sharp declines in real growth, accelerating inflation, deterioration in the terms of trade, and changes in the policy regime. Macroeconomic shocks also typically expose underlying microeconomic deficiencies in risk management practices and internal controls at financial institutions such as weak underwriting standards, insider lending, excessive credit growth and credit concentrations, interest rate and exchange rate mismatches, and fraud. They also tend to reveal weaknesses in financial system supervision and regulation. The threats to financial system stability are many and interact in complex ways. Policy responses Reflecting the many causes of financial system distress and differences in country conditions and institutional settings, responses to financial system crises typically have been varied and hybrid. Banking sector restructurings are art as well as science, and can be influenced by a host of factors, such as the depth and breadth of problems in the banking, corporate and household sectors. Other critical factors include the existence of adequate enforcement mechanisms to achieve corrective action and of financial markets that are deep enough to permit the orderly disposal of problem bank assets.

At a fundamental level, I wonder whether the crisis has engendered the most important reform of all – the development of a true credit “culture”. While necessarily a longer-term process, the existence of a sound credit culture is the sine qua non of long-term financial stability. Improved disclosure requirements for nonperforming loans, for example, will be meaningless to the BIS Review 64/1998  -5-  extent that credit standards are weak to begin with, or that there is widespread tolerance regarding the restructuring of past-due loans, motivated by an unwillingness to admit that the loans are troubled. Further enhancements to the bankruptcy and legal codes to increase the efficiency and transparency of collateral recovery are equally necessary. While supervisors have made tremendous strides to effect comprehensive, consolidated supervision globally, significant work remains to be done (and perhaps always will). The rapidly evolving international financial system, in which institutions operate to a greater degree across national borders through a variety of entities and, increasingly, in combination with securities underwriting and insurance businesses, poses continued challenges to supervisory frameworks organized primarily on a national, legal-entity, and business-specific framework. The existence of parallel, offshore, and other unregulated structures also will continue to present obstacles to the full implementation of comprehensive, consolidated supervision on a global basis. Managing these issues will require intensified coordination and information-sharing among international supervisors. Authorities need to ensure that capital adequacy guidelines keep pace with developments in internal risk measurement techniques and changes in the business of banking.