d of the Hong Kong Monetary Authority, states that "[t]he best way to ensure sound banks is to run a sound economy." On the other hand, no economy can be solid if its banks are in trouble. A fragile banking system limits a central bank's flexibility on monetary policy and makes it harder to raise interest rates (The Economist, 1997, p. S7).
There is also a clear link between banking crises and severe economic downturns, as demonstrated by the history of banking in the United States. Economic volatility has a powerful impact on the ways banks do business. When growth and inflation rates are constantly fluctuating, determining borrowers' credit risk becomes extremely difficult. In addition, a company's credit history in periods of high inflation says little about its creditworthiness in more stable times. Banks that survive by speculating in currency markets during bouts of high inflation often get into trouble when prices adjust and they must employ more conventional credit analyses (The Economist, 1997, p. S7).
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