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Should Bank Supervisors in Developing Countries Exercise More or Less Forbearance?

Patrick Honohan

Abstract

Although forbearance has been associated with more costly financial crises, a triggerhappy approach to closing weak banks could also precipitate an avoidable systemic collapse. In sophisticated regulatory environments, there can be net benefits from at least occasional acts of forbearance. But we argue that three key structural weaknesses in developing countries suggest that their regulators should have less forbearance discretion. This is because financial systems in developing countries tend to have worse information, less interdependence and greater agency problems.

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Last updated 28 August 2014 by IIIS (Email).