Financial Reconstruction in Conflict and 'Post-Conflict' Economies

This paper states that different types of conflict have different effects on the financial system therefore country priorities for reconstruction vary accordingly. It discusses some of the principal issues relating to the reconstruction of the financial sector in conflict-affected countries, focusing on currency reform, the rebuilding (or creation) of central banks, the revitalisation of the banking system, and its prudential supervision and regulation. It highlights the choices that must be made, and the tensions that exist in financial policy. Looking at the problems that repeatedly occur in reconstruction, the paper states that:

• Central banks often remain weak and under-resourced, resulting in haphazard and lenient supervision of the financial system, which is compounded by the frequently lax accounting and reporting standards of commercial banks:
  • The paper argues this hinders the application of international models of prudential supervision.
• Regulatory forbearance is common, reflecting both the technical weakness of central banks, but also the pressure of powerful interests including war criminals that straddle both state institutions and the financial sector, which result in leniency in the licensing of banks, insider-lending, excessive risk exposure, and a general failure to curb emergent bank crises:
  • These in turn destabilise economies in recovery from war, and the fiscal burden of bank crises limits development and poverty spending-thereby threatening 'post-conflict' reconstruction.