Publication date: March 1997
This conference discussed topics relevant to preventing banking crises in Latin America and the Caribbean. Its main objective was to discuss origins and remedies, ultimately devising a common framework that would render banking systems less vulnerable to systemic shocks. Three pertinent areas are discussed: reserve requirements and narrow banking, deposit insurance, and market-based regulation. Presentations on narrow banking 1) advised against it to avoid transferring business to much less transparent institutions, like the equity market, the debenture market, and other credit-creating institutions; 2) advocated narrow banking as the best approach where payment systems would be shielded from risky assets transferred to other markets; 3) recommended increasing banks required capitalization and owners liabilities and demanding better financial information and disclosure; and 4) argued that the joint provision of deposit and credit services by banks is efficient, and that separating the services among specialized institutions would be welfare-reducing. Papers on deposit insurance 1) stressed its potential for increasing the probability of insolvency through moral hazard, encouraging excessive risk taking by bank managers and reduced monitoring by bank depositors; 2) concluded that with appropriate safeguards, government deposit insurance can be the best solution to dealing with the inherent instability of fractional reserve banking; 3) noted that deposit insurance is unnecessary when a government employs macroeconomic fundamentals; and 4) proposed a model to eliminate deposit insurance, with narrow banking as an option. The New Zealand model of market-imposed supervision and regulation of the financial sector was examined; and the conference concluded with a roundtable discussion on systemic banking crises, highlighting on a case-by-case basis the weaknesses of the different banking systems, and stressing the need to reduce banking fraud, improve supervision, and solve the problem of state banks.
Publisher: World Bank