Incentive-Based Regulations and Bank Restructuring in Egypt

The Egyptian authorities undertook major banking reforms in the 1990s to create a more efficient financial system. These reforms included the strengthening of bank supervision and regulations on the basis of internationally accepted standards, to deal with the risks inherent in the new policy environment. This paper looks at banking regulatory policy in Egypt and the incentive schemes to foster healthy competition and ensure financial stability. It highlights the impediments to stronger enforcement mechanisms and considers various schemes for monitoring bank behavior under informational asymmetries, while also looking at the design of incentive-compatible safety nets. The paper also investigates the microeconomic evidence – for the 1991-1998 period - on the existence of market discipline with a model that relates deposit growth as a measure of market discipline to bank asset risk and solvency measures.