Lessons from recent banking crises
| DOI | https://doi.org/10.1108/eb024976 |
| Date | 01 March 1998 |
| Published date | 01 March 1998 |
| Pages | 253-261 |
| Author | David T. Llewellyn |
| Subject Matter | Accounting & finance |
Journal of Financial Regulation and Compliance Volume 6 Number 3
Lessons from recent banking crises
David T. Llewellyn
Received: 13th May, 1998
Department of Economics, Loughborough University, Loughborough, Leicestershire LE11 3TU;
tel:
01509 222 700; fax: 01509 223 910; e-mail: d.t.llewellyn@lboro.ac.uk
David Llewellyn is the professor of Money
and Banking at Loughborough University.
He is also a Public Interest Director of the
Personal Investment Authority, and serves
on the International Advisory Boards of
the Italian Bankers Association in Rome,
and the Financial Solutions Group of the
NCR Corporation. He is the co-author, with
Charles Goodhart and others, of a recently
published book: 'Financial Regulation:
Why, How and Where Now?', Routledge.
ABSTRACT
In recent years major banking and financial
crises
have emerged in several countries. Bank-
ing systems seem to have become more crisis-
prone. Banks in many countries have very
high levels of non-performing loans, there has
been a major
destruction
of bank capital, banks
have
failed,
and massive support operations
have been necessary. They have involved sub-
stantial costs: in some cases the cost has
exceeded 10 per cent of GNP (eg in Spain,
Venezuela, Bulgaria, Mexico, Argentina,
Hungary).
INTRODUCTION
Recent serious banking crises have not
been restricted to developing or emerging
countries. The Scandinavian banking crises
in the early 1990s were among the most
serious in Europe this century. Recent
crises in industrial, developing and emer-
ging countries have involved the destruc-
tion of bank capital on a large scale.
There are currently serious problems in
many countries of South East Asia. In the
region as a whole it has been estimated that
since July 1997 around 150 financial institu-
tions have been closed, suspended, nationa-
lised or placed under care of a restructuring
agency. In Japan problem bank loans are
now officially estimated at Y77,000bn
which is about the size of the Australian
economy. Much of the lending during the
bubble period has become worthless and
lost in the labyrinth of close corporate rela-
tionships. Banks have been able to disguise
the position by various subterfuges to con-
ceal the true value of loans. Problem loans
have often been shunted into a variety of
accounts and rolled over so as to avoid
declaring them delinquent even though
interest may not have been paid for some
years.
Recent banking crises represent major
case studies which need to be studied and
the lessons learned. They are case studies in
three areas in particular:
— how bank capital can be destroyed on a
large scale by a combination of: major
changes in the regulatory regime;
intensified competition in the banking
sector; a series of macro-economic
policy errors; sharp cyclical fluctuations
accompanied by volatile asset prices;
and weak risk analysis and management
systems within banks
— the potential vulnerability of banks in
Journal of Financial Regulation
and Compliance, Vol. 6, No. 3,
1998, pp. 253-261
© Henry Stewart Publications,
1358-1988
Page 253
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