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How to Restructure Failed Banking Systems: Lessons from the U.S. in the 1930's and Japan in the 1990's

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  • Charles Calomiris
  • Joseph R. Mason

Abstract

The costs of government assistance to banks depend on the way rescues are managed. The cnetral questions of policy reference do not revolve around whether to bail out banks, but rather around the choice of which banks to rescue and the means for doing so. If a rescue is handled skillfully, the cost can be greatly reduced. The history of assistance to U.S. banks during the Great Depression illustrates these themes well, and can provide useful lessons for Asia today. This paper reviews the history of bank distress and assistance in the United States during the 1930's and examines in detail the role of the Reconstruction Finance Corporation - how it targeted banks, the effect of its assistance, the cost of providing assistance, and the way that it tried to align bank incentives to protect against abuse of government protection. Then, the paper contrasts that experience with the recent government loans and preferred stock purchases for Japanese banks. We argue that combining subsidized preferred stock purchases with mandatory matching contributions of common stock, limits on bank dividend payments, and reforms on bank capital regulation that credibly incorporate market discipline into the regulatory process would increase the benefits and reduce the costs of government support for banks.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9624.

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Date of creation: Apr 2003
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Publication status: published as Ito, Takatoshi and Anne Krueger (eds.) Governance, Regulation, and Privatization in the Asia-Pacific Region National Bureau of Economic Research. University of Chicago Press, 2004.
Handle: RePEc:nbr:nberwo:9624

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Cited by:
  1. Ulrich Suntum & Cordelius Ilgmann, 2013. "Bad banks: a proposal based on German financial history," European Journal of Law and Economics, Springer, Springer, vol. 35(3), pages 367-384, June.
  2. Nicholas Crafts & Peter Fearon, 2010. "Lessons from the 1930s Great Depression," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 26(3), pages 285-317, Autumn.
  3. Calomiris, Charles W & Klingebiel, Daniela & Laeven, Luc, 2004. "A taxonomy of financial crisis resolution mechanisms : cross-country experience," Policy Research Working Paper Series 3379, The World Bank.
  4. Ureche-Rangau, Loredana & Burietz, Aurore, 2013. "One crisis, two crises…the subprime crisis and the European sovereign debt problems," Economic Modelling, Elsevier, Elsevier, vol. 35(C), pages 35-44.
  5. Shimizu, Katsutoshi, 2006. "How can we effectively resolve the financial crisis: Empirical evidence on the bank rehabilitation plan of the Japanese government," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 14(2), pages 119-134, April.
  6. Augusto Hasman, 2013. "A Critical Review Of Contagion Risk In Banking," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 27(5), pages 978-995, December.
  7. Cordelius Ilgmann & Ulrich van Suntum, . "Bad Banks: The Case of Germany," Working Papers, Institute of Spatial and Housing Economics, Munster Universitary 200110, Institute of Spatial and Housing Economics, Munster Universitary.

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