Bank regulation and the network paradigm: policy implications for developing and transition economies

Patrick Honohan and Dimitri Vittas

No 1631, Policy Research Working Paper Series from The World Bank

Abstract: Current issues in banking policy range from the need to construct basic institutions and incentive structures in transition economies, to the challenges posed by the increasingly complex interactions involved in contemporary banking. The authors of this report outline the basic regulatory framework needed to reduce bank failures, as shown by recent experience. Theoreticians note that banking increasingly displays network characteristics that may call for corrective action but make policy intervention ineffective or counterproductive. Networks are susceptible to externalities, redundancy, (ensuring that flows cannot be obstructed by blocking just one path), and a tendency to adapt to disturbances in a complex manner. Regulation is justified, but the complexity of the network makes successful interventions hard to design. Supervision has a role, and the authors outline the basic regulatory measures needed, but the blurring of boundaries between banking and the rest of the financial network has placed an upper bound on the effectiveness of supervision. The authors conclude that although bank failures--mitigated by deposit insurance to protect small savers--must be put up with in designing banking policy, the social cost of bank failure is not as high as is sometimes thought.

Keywords: State Owned Enterprise Reform; Public Sector Administrative & Civil Service Reform; Banks & Banking Reform; Inflation; Privatization; Energy Privatization; Financial Structures; Democratic Government; Economics and Finance of Public Institution Development; Financial Sector Policy; Public Sector Administrative and Civil Service Reform; De Facto Governments (search for similar items in EconPapers)
Date: 1996-08-31
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://documents.worldbank.org/curated/en/353571468766488445/pdf/WPS1631.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wbk:wbrwps:1631

Access Statistics for this paper

More papers in Policy Research Working Paper Series from The World Bank 1818 H Street, N.W., Washington, DC 20433. Contact information at EDIRC.
Bibliographic data for series maintained by Roula I. Yazigi ().