Economic recovery is under way at last in some emerging markets, but distressed banks are still all too common in Asia, Eastern Europe, and Latin America. During this turbulent time, however, some bankers and governments in these regions have accumulated valuable experience about managing the short- and long-term restructuring of financial institutions. Best practices for successful turnarounds have emerged and hold important lessons not only for bankers in other markets but also for governments, which too often play a stewardship role for which they are unprepared.

Successful turnarounds involve neither exotic formulas nor financial magic. Instead, management must undertake actions that appear to be obvious but are frequently ignored or resisted. Such a program usually requires banks to bring in a new management team, for example, but incumbent executives in many emerging markets are often socially or politically well connected and can thus retain their positions. A successful turnaround includes both operating improvements and a focus on the bottom line. We have worked in some markets where executives and the government thought that simply hanging on was good enough—an attitude that can prolong the agony of a troubled bank without resolving the underlying problems. During a multiyear change program, a...