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The disposition of failed Japanese bank assets: lessons from the U.S. savings and loan crisis

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  • Mark M. Spiegel

Abstract

This paper reviews the Japanese experience with \"put guarantees\" recently offered in the sale of several failed banks. These guarantees, meant to address information asymmetry problems, are shown to create moral hazard problems of their own. In particular, the guarantees make acquiring banks reluctant to accept first-best renegotiations with problem borrowers. These issues also arose in the U.S. savings and loan crisis. Regulators in that crisis turned to an alternative guarantee mechanism known as \"loss-sharing arrangements\" with apparently positive results. I introduce a formal debt model to examine the conditions determining the relative merits of these guarantees. The results show that both forms of guarantees reduce expected regulator revenues and that the impact of economic downturns on the relative desirability of the two guarantees is ambiguous.

Suggested Citation

  • Mark M. Spiegel, 2002. "The disposition of failed Japanese bank assets: lessons from the U.S. savings and loan crisis," Economic Review, Federal Reserve Bank of San Francisco, pages 1-15.
    • Handle: RePEc:fip:fedfer:y:2002:p:1-15
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    References listed on IDEAS

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    1. Oliver Hart & John Moore, 1998. "Default and Renegotiation: A Dynamic Model of Debt," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(1), pages 1-41.
    2. Frederick S. Carns & Lynn A. Nejezchleb, 1992. "Bank failure resolution, the cost test and the entry and exit of resources in the banking industry," Proceedings 350, Federal Reserve Bank of Chicago.
    3. James, Christopher, 1991. "The Losses Realized in Bank Failures," Journal of Finance, American Finance Association, vol. 46(4), pages 1223-1242, September.
    4. Stover, Roger D., 1997. "Early resolution of troubled financial institutions: An examination of the accelerated resolution program," Journal of Banking & Finance, Elsevier, vol. 21(8), pages 1179-1194, August.
    5. Mark M. Spiegel, 2001. "The disposition of failed bank assets: put guarantees or loss-sharing arrangements?," Working Paper Series 2001-12, Federal Reserve Bank of San Francisco.
    6. Gupta, Atul & LeCompte, Richard L. B. & Misra, Lalatendu, 1997. "Taxpayer subsidies in failed thrift resolution: The impact of FIRREA," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 327-339, July.
    7. Eric S. Rosengren & Katerina Simons, 1994. "Failed Bank Resolution and the Collateral Crunch: The Advantages of Adopting Transferable Puts," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(1), pages 135-147, March.
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    Cited by:

    1. Shin‐Ichi Fukuda & Satoshi Koibuchi, 2006. "The Impacts Of “Shock Therapy” Under A Banking Crisis: Experiences From Three Large Bank Failures In Japan," The Japanese Economic Review, Japanese Economic Association, vol. 57(2), pages 232-256, June.
    2. Shin-ichi Fukuda & Satoshi Koibuchi, 2005. "The Impacts of "Shock Therapy" under a Banking Crisis: Experiences from Three Large Bank Failures in Japan (Subsequently published in "Japanese Economic Review" Vol. 57, No. 2 (Jan," CARF F-Series CARF-F-038, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.

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