Bank Insolvency and Stabilization in Eastern Europe

IMF Working Papers, January 1, 1992

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The profound structural reform underway in Eastern Europe has revealed the weakness of the banking sector.
Weaknesses in the banking sector threaten macroeconomic stability and other reforms.
A model is developed that:
- Clarifies the role of banking in an emerging market economy.
- Illustrates the danger that disturbances inherent to emerging markets may be magnified and prolonged by a banking collapse.
Core implication: priority must be given to mobilizing fiscal resources to cover the costs of restructuring the banking sector.

The model links banking sector health to broader emerging market dynamics and shows amplification and persistence of disturbances when banks fail.
Emphasis on banking as a transmission and amplification mechanism for economic shocks in transitional economies.
Highlights interactions among bank solvency, credit provision, enterprise reform, and macroeconomic outcomes.

Mobilize fiscal resources to cover the costs of restructuring the banking sector.
Prioritize banking sector stabilization to safeguard macroeconomic stability and sustain structural reforms.

Subjects: Bank credit, Bank solvency, Banking, Commercial banks, Consumption, Currencies, Financial institutions, Financial sector policy and analysis, Loans, Money, National accounts
Keywords: bank contract, bank portfolio, Bank solvency, banking system, capital stock, cash flow, Commercial banks, Consumption, consumption good, Currencies, Eastern Europe, enterprise reform, heterogenous firm, index-linked liability, Loans, market clearing price, money supply, nominal rate, payment ability, price level, socialist economy, WP

International Monetary Fund — Bank Insolvency and Stabilization in Eastern Europe, IMF Working Papers 1992, 009 (1992).