Journal Article

Banking and Regulation in Emerging Markets: The Role of External Discipline

Xavier Vives

in The World Bank Research Observer

Published on behalf of World Bank

Volume 21, issue 2, pages 179-206
Published in print January 2006 | ISSN: 0257-3032
Published online August 2006 | e-ISSN: 1564-6971 | DOI: http://dx.doi.org/10.1093/wbro/lkl002
Banking and Regulation in Emerging Markets: The Role of External Discipline

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This article reviews the main issues of regulating and supervising banks in emerging markets with a view toward evaluating the long-run options. Particular attention is paid to Latin America and East Asia. These economies face a severe policy commitment problem that leads to excessive bailouts and potential devaluation of claims of foreign investors. This exacerbates moral hazard and makes a case for importing external discipline (for example, acquiring foreign short-term debt). However, external discipline may come at the cost of excessive liquidation of entrepreneurial projects. The article reviews the tradeoffs imposed by external discipline and examines various proposed arrangements, such as narrow banking, foreign banks and foreign regulation, and the potential role for an international agency or international lender of last resort.

Journal Article.  12698 words. 

Subjects: Development Planning and Policy

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