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The banking system in emerging economies: how much progress has been made?



The changing nature of risks facing banks - BIS Papers No 28, part 4, August 2006 BIS Papers No 28 67 The changing nature of risks facing banks Ramon Moreno1 Introduction Emerging market financial systems have proved to be less resilient than the banking systems of developed countries. Views differ about the reasons for this. Some argue that an unstable macroeconomic environment is the main culprit. Others blame poor risk management. In this note we draw on the results of a survey of emerging market central bank meeting participants to shed light on the possible contributions of these two broad factors to changing banking resilience. We explore: (1) the changing nature of macroeconomic risks; (2) new forms of risk to banks; and (3) whether the capacity to manage risks has improved. We conclude the paper with an overview of what we know about the vulnerability of the banking sector in emerging markets at this time. 1. The changing nature of macroeconomic risks Emerging economies are exposed to larger shocks than are developed countries.2 Annex Table A1 shows that in the second half of the 1990s, the volatility of growth in output, consumer prices, and the real exchange rate, as well as that of the ratio of bank credit to the private sector to GDP, was consistently much higher in emerging than in developed market economies. Macroeconomic volatility would discourage the provision of credit by increasing uncertainty about prospective returns and exposing banks to potentially large losses. However, more recently macroeconomic conditions appear to have improved considerably: Annex Table A1 also reveals a sharp decline in the volatility of these macroeconomic indicators in emerging economies in the last decade, although it still tends to be higher than in developed countries. Whether the recent period of low volatility will continue remains uncertain, but a number of structural changes have occurred which might be expected to enhance macroeconomic resili

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