NCPA - National Center for Policy Analysis

Bank Failures May Trigger Crisis

May 7, 1997

The next economic crisis may be triggered by unstable banks abroad, according to international financial experts. Despite a decade of economic reforms and advancing capitalism worldwide, the condition of banks in a number of nations is a source of concern.

  • Since 1980, 133 of the International Monetary Fund's 181 member countries have had "significant" problems and 52 developing countries have lost most or all of their banking-system capital.
  • A dozen developing countries have spent sums equal to 10 percent or more of annual gross domestic product to clean up banking problems.
  • Repairing banks in developing and former communist countries has cost nearly $250 billion since 1980, reports Dublin's Economic and Social Research Institute.
  • Of 58 banks around the world rated by Moody's Investor Service as most likely to need rescuing, 40 are in emerging markets -- although Japan, with nine, has the most on the list.

Experts estimates that one-fifth of the roughly $600 billion of China's bank loans are bad -- blaming lending to China's state-owned enterprises. They say that losses there could amount to the equivalent of 20 percent of the country's GDP.

More than a dozen of Bulgaria's 40 or so private and state-run banks are now closed, after being forced to lend heavily to state-run enterprises.

Among the reasons given for the precarious state of banks is an insufficient increase in their capital base at a time of rapid growth. Also, state-run or state-influenced banks are poor at -- or just don't care about -- evaluating credit risk. India's state-run system has been called a "timebomb."

Recognizing that a bank failure in one country can quickly have effects worldwide, banking officials in the U.S. and other developed countries are reportedly closely monitoring troubled banks and offering advice. Private credit-rating agencies and big investment houses are also participating.

Source: David Wessell, Robert Frank and Ian Johnson, "Next Economic Crisis May Stem from Woes of the World's Banks," Wall Street Journal, May 7, 1997.

 

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