Aristóbulo de Juan - From Good to Bad Bankers: Lessons Learned from a 50-Year Career in Banking

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In the late 1980s, the World Bank began to review the lessons of financial development and discovered that commercial and policy-based banks were failing not just in the developing countries, but also in the advanced economies. More than 25 developing countries took action during the 1980s to restructure financial institutions that were distressed. Something was seriously wrong with development if the financial sector does not work properly. Accordingly, the Bank assembled a team under the leadership of then Chief Economist, Stan Fischer, to disseminate the news and to prepare the World Development Report 1989, which was devoted to the theme, Financial Systems and Development.

The Report was prepared by Millard Long, the Division Chief in Financial Policy and Systems Division of the Research Department, with a team that included Yoon Je Cho, Dimitri Vittas and Barbara Kafka. As part of the preparatory work, research projects and seminars were held to draw experience from all over the world. I was lucky to be hired in October 1989 as part of the Division to study bank failure and restructuring experience. Amongst the team already in place was Aristbulo de Juan, a distinguished banker from the Bank of Spain, who had deep understanding of bank insolvency and failure from both the commercial banking and supervisory sides. He led a fight against the then conventional wisdom of deregulation and consolidation as the panacea to solve banking crises. Instead, he strongly advocated for identifying and solving problems by mechanisms based on asset evaluation and real cash flows. He thus changed the World Bank approach to diagnose and treat problem systems and became very well-known at the Bank and in a variety of countries.

The 1989 Report was seminal because it revealed how financial crises have many causes, both micro and institutional and the result of policy mistakes, distorted interest rates and exchange rates, and political failure. The team that Millard Long led, aided by Alan Gelb (later Chief Economist, Africa), comprised some of the most illustrious thinkers and doers in the finance field. Millard himself went on to advise the financial sector reforms in Russia and Eastern Europe. Patrick Honohan became the Governor of the Bank of Ireland, using all that he learnt to turn around the Irish banking system in 20092015. Jerry Caprio went to Brown University, producing books on financial regulation and finance. Yoon Je Cho returned to Korea to advise several presidents and is today Korean Ambassador to the United States. Ross Levine led the work on why finance matters to growth and, later, why bad regulatory policies contributed to later crises. He is today at the University of California, Berkeley. Asli Demurgic-Kunt from Turkey is today Director of Research at the World Bank and helped build the financial development database set. Stan Fischer was to become Deputy Managing Director of the IMF, Governor of the Bank of Israel and Deputy Chairman of the Fed Board of Governors.

Working from different countries with different experiences, the intellectual atmosphere at that time was electric, with different people contributing to the huge debate on why finance matters. Much of the work produced at that time remains as important insights to the financial crises that unfolded in 1997 in Asia and ten years later in 2007.