The authors have provided us with an interesting chapter that stimulated my thinking on a number of policy issues. They successfully identify the key problem concerning developing countries, in general, and TSEs, in particular, that are undertaking financial reforms — namely, how to obtain the efficiency gains of such reforms without experiencing the adverse consequences that can arise as a result of excessive risk-taking because of the extensive implicit and/or explicit guarantees that the government will ensure the soundness of the financial system. Historical experience in developing countries has shown, time and time again, that the authorities will not allow large financial institutions to fail without taking steps to protect depositors (and often other creditors and even shareholders). The authors argue that the moral hazard problems created by these guarantees cannot be cured by enhanced supervision; they require that steps be taken to increase the franchise value of banks, primarily by limiting entry into the financial system.
KeywordsFinancial System Banking System Capital Control Moral Hazard Problem Financial Reform
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