By Andrew Sheng
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Additional info for Bank restructuring: lessons from the 1980s
Governments' ability to transfer real sector inefficiencies to savers through the inflation tax became severely weakened as financial markets globalized. Savers simply escaped the inflation tax through capital outflows, putting grave pressure on the exchange rate. Deregulation of financial markets and liberalization of trade and capital flows open up the possibility of large portfolio shifts from domestic financial assets (disintermediation) as wealthholders perceive potential losses from bad policies, bad management, or bad institutional frameworks.
Real lending rates for countries that underwent financial crisis varied from more than 40 percent a year in Chile (198183) to over 200 percent in Argentina (198485). Nominal exchange rates plunged as inflation rose. S. dollar, in which more than half the foreign currency assets of the BIS reporting banks are denominated, depreciated by 30 percent in real terms during the 1980s, compared with a variation of less than 10 percent during 197680. The world banking system, which had experienced relatively stable interest rates during the 1950s, 1960s, and most of the 1970s, suddenly had to cope with rapidly changing interest and exchange rates and large capital flows as funds moved rapidly both domestically and internationally in search of higher yields at lower risks.
Prevention is better than a cure. But can a failproof banking system be designed? S. " Even if banks held nothing but low-risk government obligations, there is no guarantee that the government itself would never default on its debt. The process of bank restructuring continues in many countries. For the post-centrally planned economies in transition to market-based economies, bank restructuring will be a challenge that continues well into the 1990s. For the post-liberalization economies, that is, economies that have opened their capital accounts, the challenge now is how to manage the banking system risks in a volatile world of global capital flows (chapter 12).