Management and Resolution of Banking Crisis: Lessons from the Republic of Korea and Mexico

This paper analyses and compares the strategies and policies implemented in Korea and Mexico to manage and resolve their banking crises. It identifies eight stages for resolving a banking crisis and examines the responses of Korea and Mexico in each of them: (i)containing systematic risks, (ii) establishment of an overall crisis resolution unit, (iii) recognition of losses, (iv) reduction of bad assets, (v) recapitalization of banks, (vi) restructuring of corporate/household debt, (vii) strengthening of prudential regulation and supervision, and (viii) Management and disposition of impaired assets. In addition, the paper compares the management of both crises in terms of transparency of decision making, speed and sequencing of reforms, and social and political obstacles faced for crisis resolution. The paper stresses four points: Firstly, there is no single approach for managing systematic banking crises. What works in one country does not necessarily work in others. Secondly, to a large extent, the resolution of a banking crisis is a managerial problem. The resolution of a crisis will depend on the ability of a government to deliver rapid and sequenced responses, remove legal and administrative obstacles, create consensus around a strategy, implement unpopular measures, coordinate involved agencies, and resist opposition from affected interest groups. Thirdly, a key factor for resolving a crisis is the realistic recognition of banks' losses at the early stages of a crisis. Unrealistic recognition of problems will likely lead to ..........