FINANCIAL SECTOR REFORMS
393
and hence a decline in the net worth of business, which precipitates defaults
on loans and bankruptcies, threatening the solvency and liquidity of the finan-
cial system.
23,24
The banks respond to this by viewing all loans as becoming
riskier—the
LF
shifts to the right—and they cut access to credit as the net
worth of firms declines.
Weak bank supervision and lending to interrelated entities has often been
witnessed concomitant with repressed financial systems. Bank solvency in such
a situation reflects the weak capital bases, poor loan portfolio, and inefficient
management that is a part of a repressed ...
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