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Are all banking crises alike? The Japanese experience in international comparison

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  • Michael Hutchison
  • Kathleen McDill

Abstract

This paper examines episodes of banking sector distress for a large sample of developed and developing countries, highlighting the experience of Japan. By a host of criteria, Japan appeared to be in a stronger position than most countries at the onset of banking problems - low inflation, appreciating currency, balanced government budget, and large external surpluses. However, Japan followed a clear international boom-and-bust pattern in terms of real output growth, credit growth and stock price movements. We estimate a multivariate probit model that links the likelihood of banking problems to a set of macroeconomic variables and institutional characteristics. The model predicts a high probability of banking sector distress in Japan in the early 1990s. In particular the likelihood of an episode of banking distress rose in line with the sharp drop in asset prices, deepening recession and a "moral hazard' problem (financial liberalization combined with explicit deposit insurance). The Japanese case is also noteworthy by the long duration of the banking crisis, the length of the coincident recession and general malaise over the economy, the slow regulatory response, and the long delay in the commitment of public funds to re-capitalize the banking sector.

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series with number 99-02.

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Date of creation: 1999
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Handle: RePEc:fip:fedfpb:99-02

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Keywords: Financial crises - Japan;

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  1. Eichengreen, Barry & Rose, Andrew K, 1998. "Staying Afloat When the Wind Shifts: External Factors and Emerging-Market Banking Crises," CEPR Discussion Papers 1828, C.E.P.R. Discussion Papers.
  2. Thomas F. Cargill & Michael M. Hutchison & Takatoshi Ito, 1997. "The Political Economy of Japanese Monetary Policy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262032473, December.
  3. Kaminsky, Graciela & Lizondo, Saul & Reinhart, Carmen M., 1997. "Leading indicators of currency crises," Policy Research Working Paper Series 1852, The World Bank.
  4. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  5. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  6. Calvo, Guillermo A, 1996. "Capital Flows and Macroeconomic Management: Tequila Lessons," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(3), pages 207-23, July.
  7. Demirguc-Kent, Asli & Detragiache, Enrica, 1998. "Financial liberalization and financial fragility," Policy Research Working Paper Series 1917, The World Bank.
  8. Alexander Kyei, 1995. "Deposit Protection Arrangements: A Survey," IMF Working Papers 95/134, International Monetary Fund.
  9. Asli Demirgüç-Kunt & Enrica Detragiache, 1998. "The Determinants of Banking Crises in Developing and Developed Countries," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 81-109, March.
  10. Caprio, Gerard Jr. & Klingebiel, Daniela, 1996. "Bank insolvencies : cross-country experience," Policy Research Working Paper Series 1620, The World Bank.
  11. Michael Hutchison, 1997. "Financial crises and bank supervision: new directions for Japan?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue dec12.
  12. International Monetary Fund, 1998. "Leading Indicators of Banking Crises," IMF Working Papers 98/91, International Monetary Fund.
  13. Laurence Ball & N. Gregory Mankiw & David Romer, 1988. "The New Keynsesian Economics and the Output-Inflation Trade-off," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 1-82.
  14. Jacklin, Charles J & Bhattacharya, Sudipto, 1988. "Distinguishing Panics and Information-Based Bank Runs: Welfare and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 568-92, June.
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