Daniel C. Hardy

Microfinance Institutions and Public Policy

Many governments and nongovernmental organizations have adopted policies to promote the growth of microfinance institutions (MFIs). The appropriate level and form of support for MFIs are discussed in this paper on the basis of a review of key MFI characteristics. Governments are also responsible for the regulation of MFIs; here, some principles concerning the extent and coverage of MFI regulation and supervision are developed.

Cross-Border Coordination of Prudential Supervision and Deposit Guarantees

We study the optimal joint design of prudential supervision and deposit guarantee regulations in a multi-country, integrated banking market, where policy-makers have preferences regarding profitability and stability of the banking sector. Non-coordinated policies will tend to yield too little supervision and too much deposit insurance. The paper concludes with recommendations on policy priorities in this area.

Crisis Management and Resolution for a European Banking System

This paper proposes an integrated crisis management and resolution framework for the EUs single banking market. It comprises a European Resolution Authority (ERA), armed with the mandate and the tools to deal cost-effectively with failing systemic cross-border banks, and is designed to address many fundamental operational and incentive problems. It also seeks to reduce moral hazard and better protect countries against the risk of twin fiscal-financial crises by detaching banks from government budgets. The ERA would be most effective if it were twinned or combined with a European Deposit Insurance and Resolution Fund.

Banking Crises and Bank Resolution: Experiences in Some Transition Economies

It has been estimated that in the past 20 years over half the members of the IMF have experienced banking crises.2 Among these, much attention has been paid to the Nordic banking crises of the early 1990s;3 more recently the focus has been on the crises that hit several Asian countries in the late 1990s.4 Between these two well-recorded episodes was a set of major banking crises that critically affected economic developments in a further group of countries: the transition economies. During the 1990s, most of the countries that were undertaking the difficult transition from a centrally planned to a market economy experienced banking crises of varying severity. These crises reflected in part factors specific to countries emerging from state socialism. Banks in transition economies were characterized by linkages to loss-making public and private enterprises, insider lending, absence of sound prudential practices, and legacy problems from the earlier regimes in their countries, all of which characteristics helped undermine the soundness of banking systems in these countries.5 To a surprising extent, however, the experiences of the transition economies reflected factors common to banking crises across all types of economies—transition economies were clearly more vulnerable than others to the emergence of banking problems, but overall the factors contributing to systematic banking sector problems in these countries had a great deal in common with those found elsewhere. Similarly, the lessons that can be learned, in particular on how the authorities handled the crises, may also be of wider applicability.

Anticipation and surprises in central bank interest rate policy : the case of the bundesbank

Market reaction to a change in official interest rates will depend on the extent to which the change is anticipated, and on how it is interpreted as a signal of future policy. In this paper, a technique is developed to separate the anticipated and unanticipated components of such changes, and applied to estimate the response of euro--deutsche mark interest rates to adjustments in the Bundesbanks Lombard and discount rates.

Soft Budget Constraints, Firm Commitments and the Social Safety Net

It is shown that the inefficiencies created by the soft budget constraint enjoyed by enterprises in Eastern Europe and elsewhere will continue so long as governments are unable credibly to threaten not to bail out loss makers. The institution of a suitable social safety net can strengthen commitment to a hard budget constraint. The burden on the social safety net can be reduced by the (endogenous) development of financial markets.

Bank Insolvency and Stabilization in Eastern Europe

The structural reforms under way in Eastern Europe have revealed the weakness of the banking sector there; macroeconomic stability and other reforms are thereby threatened. A model is developed that clarifies the role of banking in an emerging market economy and the danger that the disturbances inherent to it may be magnified and prolonged by a banking collapse.

Cooperative and Islamic Banks: What Can They Learn from Each Other?

Islamic and cooperative banks such as credit unions are broadly similar in that they both share some risk with savers. However, risk sharing goes along with ownership control in cooperatives, whilst Islamic banks share risk with borrowers and downside risk with depositors. Islamic banking is consistent with mutual ownership, which may ease some of the governance and efficiency concerns implied by Shari’ah constraints. Greater risk sharing among cooperative bank stakeholders, using mechanisms embedded in Islamic financial products, may strengthen cooperatives’ financial resilience.

Bank resolution costs, depositor preference and asset encumbrance

Depositor preference and collateralization of borrowing may reduce the cost of settling the conflicts among creditors that arises in case of resolution or bankruptcy. This net benefit, which may be capitalized into the value of the bank rather than affect creditors’ expected returns, should result in lower overall funding costs and thus a lower probability of distress despite increasing encumbrance of the bank’s balance sheet. The benefit is maximized when resolution is initiated early enough for preferred depositors to remain fully protected.

Market Information and Signaling in Central Bank Operations, or, How Often Should a Central Bank Intervene?

A central bank must decide on the frequency with which it will conduct open market operations and the variability in short-term money market that it will allow. The paper shows how the optimal operating procedure balances the value of attaining an immediate target and broadcasting the central banks intentions against the informational advantages to the central bank of allowing the free play of market forces to reveal more of the information available to market participants.