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Resolving a banking crisis: what worked in New England

  • John S. Jordan
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    Many Asian economies are now experiencing economic hardship, their troubles stemming in part from crises in their banking sectors. Given the important role the banking sector plays in these economies, resolution of their banking crises is a vital first step toward resuming economic growth. Unfortunately, the steps taken so far appear inadequate, and many observers compare current attempts to those of U.S. regulators during our initial efforts to resolve the S&L crisis. Given the lengthy time it took and the high cost of the taxpayer-supported resolution, this is not a comparison the Asian countries should welcome. ; The six New England states also experienced a severe banking crisis, losing more than 15 percent of their banks in the early 1990's. The New England crisis was resolved at far less cost and in a much more timely manner than the S&L crisis. This article examines the behavior and interactions of bankers, regulators, and market participants during the crisis. The author finds that failing New England banks, in their final years, did not increase the riskiness of their operations in a last-chance effort to salvage their firms. Strict regulatory oversight, public disclosure of banking problems, and market discipline also contributed to the success of the resolution.

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    File URL: http://www.bostonfed.org/economic/neer/neer1998/neer598c.htm
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    File URL: http://www.bostonfed.org/economic/neer/neer1998/neer598c.pdf
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    Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

    Volume (Year): (1998)
    Issue (Month): Sep ()
    Pages: 49-62

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    Handle: RePEc:fip:fedbne:y:1998:i:sep:p:49-62
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    1. Richard E. Randall, 1993. "Lessons from New England bank failures," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 13-35.
    2. Kane, Edward J, 1989. "The High Cost of Incompletely Funding the FSLIC Shortage of Explicit Capital," Journal of Economic Perspectives, American Economic Association, vol. 3(4), pages 31-47, Fall.
    3. Ronn, Ehud I & Verma, Avinash K, 1986. " Pricing Risk-Adjusted Deposit Insurance: An Option-Based Model," Journal of Finance, American Finance Association, vol. 41(4), pages 871-95, September.
    4. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
    5. Joe Peek & Eric Rosengren, 1991. "The capital crunch: neither a borrower nor a lender be," Working Papers 91-4, Federal Reserve Bank of Boston.
    6. Flannery, Mark J & James, Christopher M, 1984. " The Effect of Interest Rate Changes on the Common Stock Returns of Financial Institutions," Journal of Finance, American Finance Association, vol. 39(4), pages 1141-53, September.
    7. Thomas E. Pulkkinen & Eric S. Rosengren, 1993. "Lessons from the Rhode Island banking crisis," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 3-12.
    8. Marcus, Alan J & Shaked, Israel, 1984. "The Valuation of FDIC Deposit Insurance Using Option-pricing Estimates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(4), pages 446-60, November.
    9. Katerina Simons, 1995. "Interest rate derivatives and asset-liability management by commercial banks," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 17-28.
    10. Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June.
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