Making banking safe and sound in developing countries requires (1) paying more attention to factors that restrict banks' ability and willingness to diversify risk and (2) giving three key groups - owners (and managers), the market, and supervisors - more incentive and ability to monitor banks and ensure their prudent corporate governance.
Drawing on earlier work, Caprio reviews some of the salient facts about the boom in banking busts in developing countries. He then reviews policy responses taken by authorities in some of the "early" crisis countries, and considers a wider menu of responses - in particular the currently popular suggestion that promulgating an International Banking Standard would significantly improve the safety and soundness of banking systems in developing countries.
Such a standard is not without appeal, but other approaches are probably necessary in developing countries where risks are usually greater, financial institutions are less diversified, markets are less transparent, supervision is weak, and other ingredients critical to sound banking are either missing or scarcer than in industrial countries.
Caprio calls for a multipillar approach to safe and sound banking, one that would:
This paper - a product of the Finance and Private Sector Development Division, Policy Research Department - was prepared for the Brookings Conference, "FDICIA: Bank Reform Five Years Later and Five Years Ahead," held on December 19, 1996. Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Bill Moore, room N9-038, telephone 202-473-8526, fax 202-522-1155, Internet address gmoore1@worldbank.org. (27 pages)
The full report is available in PDF format.