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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
9624.
Length: Date of creation: Apr 2003 Date of revision: Handle: RePEc:nbr:nberwo:9624
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Find related papers by JEL classification: G2 - Financial Economics - - Financial Institutions and Services E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Charles W. Calomiris & Eugene N. White, 1994.
"The Origins of Federal Deposit Insurance,"
NBER Chapters,
in: The Regulated Economy: A Historical Approach to Political Economy, pages 145-188
National Bureau of Economic Research, Inc.
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