Crisis Response

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This series of public policy briefs focuses on the private sector and the financial crisis, assessing the policy responses, shedding light on financial reforms currently under debate, and providing insights for emerging-market policy makers.

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Now showing 1 - 10 of 12
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    Bank Governance
    (World Bank, Washington, DC, 2010-03) Ard, Laura ; Berg, Alexander
    Principles of good governance have been a major component of international financial standards and are seen as essential to the stability and integrity of financial systems. Over the past 10 years much energy and attention have gone to improving the ability of company boards, managers, and owners to prudently navigate rapidly changing and volatile market conditions. So, how to explain the events of 2007-08? Many of the recent problems can be traced to flawed implementation of good principles and to behavior prompted by increasingly short-term performance horizons.
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    State Financial Institutions : Can They Be Relied on to Kick-Start Lending?
    (World Bank, Washington, DC, 2010-01) Rudolph, Heinz P.
    The need to kick-start lending to the real sector in response to the global financial crisis is leading many countries to expand the role of state-owned financial institutions. The effectiveness of the support by these institutions depends in large part on the nature of the shock, on their ability to leverage private commercial banks to scale up their impact, and on the existence of a sound institutional framework. While it is too early to evaluate their effectiveness, past experience with the use of such institutions is sobering. Whether countries will heed the les sons of this experience remains to be seen.
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    The Leverage Ratio : A New Binding Limit on Banks
    (World Bank, Washington, DC, 2009-12) D'Hulster, Katia
    Excessive leverage by banks is widely believed to have contributed to the global financial crisis. To address this, the international community has proposed the adoption of a non-risk-based capital measure, the leverage ratio, as an additional prudential tool to complement minimum capital adequacy requirements. Its adoption can reduce the risk of excessive leverage building up in individual entities and in the financial system as a whole. The leverage ratio has inherent limitations, however, and should therefore be considered as just one of a set of macro- and micro-prudential policy tools.
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    Credit Rating Agencies
    (World Bank, Washington, DC, 2009-10) Katz, Jonathan ; Salinas, Emanuel ; Stephanou, Constantinos
    In the United States and Europe faulty credit ratings and flawed rating processes are widely perceived as being among the key contributors to the global financial crisis. That has brought them under intense scrutiny and led to proposals for radical reforms. The ongoing debate, while centered in major developed markets, will also influence policy choices in emerging economies: whether to focus on strengthening the reliability of ratings or on creating alternative mechanisms and institutions that can perform more effectively the role that in developed markets has traditionally been conferred on credit rating agencies.
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    Banks in Crisis
    (World Bank, Washington, DC, 2009-10) Scott, David
    The current financial crisis evolved quickly. In most of the developed countries affected, governments initially improvised solutions that eventually led to substantial investments in systemically important banks. Not all their actions are worth emulating, especially those that undermine normal governance arrangements and the ability of all shareholders to hold the banks' board and management accountable. Lessons from earlier crises show that governments acting as temporary owners can minimize costs to taxpayers by following sound commercial practices and good corporate governance principles. Quickly developing and making public the exit strategy is also important.
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    Macro-Prudential Regulation
    (World Bank, Washington, DC, 2009-07) Persaud, Avinash
    This is not the first international banking crisis the world has seen. The previous ones occurred without credit default swaps, special investment vehicles, or even credit ratings. If crises keep repeating themselves, it seems reasonable to argue that policy makers need to carefully consider what they are doing and not just 'double up' by superficially reacting to the specific features of today's crisis. While we cannot to prevent crises, we can perhaps make them fewer and milder by adopting and implementing better regulation in particular, more macro-prudential regulation.
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    Trust Less, Verify More
    (World Bank, Washington, DC, 2009-07) Briault, Clive
    Financial supervision will need to change in response to the causes of the financial crisis and the regulatory proposals arising from it. Supervisors will need to take a tougher and more challenging approach to the firms they regulate, exercise more supervisory judgment, involve themselves in macro-prudential oversight, and participate more actively in the supervision of firms with cross-border activities. Supervisors in all countries need to take up these challenges, notwithstanding differences in the style of supervision, in culture and legal tradition, in institutional and organizational structure, and in the powers and resources available to the supervisory agency.
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    Dynamic Provisioning
    (World Bank, Washington, DC, 2009-07) Saurina, Jesus
    Dynamic loan loss provisions can help deal with procyclicality in banking. By allowing earlier detection and coverage of credit losses in loan portfolios, they enable banks to build up a buffer in good times that can be used in bad times. Their anticyclical nature enhances the resilience of both individual banks and the banking system as a whole. While there is no guarantee that they will be enough to cope with all the credit losses of a downturn, dynamic provisions have proved useful in Spain during the current financial crisis. They could be an important prudential tool for emerging economies, where banks dominate financial intermediation.
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    Blanket Guarantees
    (World Bank, Washington, DC, 2009-06) Feyen, Erik ; Vittas, Dimitri
    The expansion of deposit insurance and introduction of debt guarantees have played a crucial role in containing the financial crisis while giving governments time to develop suitable policy responses. But these measures do not address the root causes of the crisis, and they lead to competitive distortions, moral hazard, and large fiscal contingent liabilities. Rolling them back is likely to require an internationally coordinated effort and an answer to the important question, 'exit to what?'
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    Dealing with the Crisis
    (World Bank, Washington, DC, 2009-06) Stephanou, Constantinos
    The immediate financial sector policy responses to the financial crisis, including emergency liquidity support, expansion of financial safety nets, and interventions in financial institutions, have succeeded in stemming widespread panic. But the effort has generally been insufficient and ad hoc. Issues that remain include the resolution of problem assets, the restructuring of troubled, systemically important financial institutions, and the development of credible exit strategies. Only a handful of countries have attempted to tackle these issues head-on. As past experience has shown, that may well have negative repercussions for the duration and strength of a subsequent recovery.