But if banking supervision is to really work in such economies, regulators must be given more power than is often the case, according to Augusto de la Torre, an economist and former general manager of the Central Bank of Ecuador.

Speaking at a recent seminar at the IDB's Washington, D.C., headquarters, De la Torre called for a reevaluation of the role of the state in ensuring market discipline. "Where the perception of systemic risk is greater, the role of the state should be greater," he said. Authorities should be capable of punishing those who commit fraud and demonstrate that even the owners of the banks can lose money in a crisis, he added.

Legislation that limits the role of regulators to simply liquidating troubled banks can work in countries whose financial systems have been stabilized, such as in Chile, said de la Torre. But in countries where the financial system remains in transition, authorities must be given more freedom to intervene when necessary, he added.

De la Torre said he favored deposit insurance as a measure to protect depositors, because it explicitly charges for a service that would otherwise be implicit. He also recommended that both monetary policy and banking supervision be concentrated in an independent central bank.

"Politicized and corrupt judicial systems can be permeated by the interests of bankers," de la Torre warned. He called judicial reform indispensable to successful financial reform.