Handling Banking Crises ; The Case of Russia

Since August 1998, Russia has been suffering from a severe banking crisis. In finding a solution, the substantial foreign liabilities commercial banks and the failure of the government to service its liabilities need to be taken into account. The paper discusses externality, adverse selection, and moral hazard problems of bank recapitalization. We suggest that banks should be offered to their foreign creditors for recapitalization and that banks which cannot attract additional funds should be closed. In order to facilitate the transfer of control to foreign creditors and to limit asset stripping, the government should take over control from the banks' old shareholders.