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Assessing Damages: The 1983 Israeli Bank Shares Crisis

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  • AA Blass
  • RS Grossman

Abstract

In 1983, Israeli bank shares collapsed following several years during which the banks had actively intervened to promote share prices and thereby contributed to a 300% rise in real terms. During the crisis the government assumed control of the banks, which they did not begin to sell back to the public until 1993. We compare 1993 bank share prices after the banks were partially relisted on the Stock Exchange with 1983 precrisis values. The 1993 time-adjusted market values were $10 billion lower than in 1983, a decline borne by precrisis shareholders ($4 billion) and by taxpayers ($6 billion). Of this latter amount, two-thirds represents a transfer from the government to shareholders, while approximately one-third represents an efficiency loss - and hence a direct cost - resulting from government ownership of the banks for 10 years following the crisis. The results highlight the risk inherent in a banking system that is both concentrated and universal and illustrates the costs associated with sustained government ownership. Copyright 2001 Western Economic Association International.

Suggested Citation

  • AA Blass & RS Grossman, 2001. "Assessing Damages: The 1983 Israeli Bank Shares Crisis," Contemporary Economic Policy, Western Economic Association International, vol. 19(1), pages 49-58, January.
  • Handle: RePEc:bla:coecpo:v:19:y:2001:i:1:p:49-58
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1465-7287.2001.tb00049.x
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    References listed on IDEAS

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    1. Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1993. "Why Is Rent-Seeking So Costly to Growth?," American Economic Review, American Economic Association, vol. 83(2), pages 409-414, May.
    2. King, Mervyn, 1994. "Debt deflation: Theory and evidence," European Economic Review, Elsevier, vol. 38(3-4), pages 419-445, April.
    3. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-276, June.
    4. Blass, Asher A. & Grossman, Richard S., 1996. "Financial fraud and banking stability: The Israeli bank crisis of 1983 and trial of 1990," International Review of Law and Economics, Elsevier, vol. 16(4), pages 461-472, December.
    5. Asquith, Paul & Mullins, David Jr., 1986. "Equity issues and offering dilution," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 61-89.
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    Cited by:

    1. Richard S.Grossman, 2016. "Banking Crises," Wesleyan Economics Working Papers 2016-001, Wesleyan University, Department of Economics.

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    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services

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