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Japan's Experience with Deposit Insurance and Failing Banks: Implications for Financial Regulatory Design?

  • Milhaupt, Curtis-J

    (Columbia Law School)

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    This paper examines three decades of Japanese experience with deposit insurance and failing banks, and analyzes the implications of that experience for bank safety-net reform in other countries. To date, the literature and policy debate on deposit insurance have been heavily colored by U.S. banking history and focus almost exclusively on explicit deposit protection schemes. Analysis of Japan's safety-net experience suggests that (1) deposit insurance, for all its flaws, is superior to the real-world alternative--implicit government protection of depositors and discretionary regulatory intervention in bank distress; (2) a well- designed explicit deposit insurance system that includes a credible bank- closure policy is the starting point for the design of effective private alternatives to a government-run safety net; and (3) the trend toward greater institutionalization of the Japanese safety net--culminating in recent legislation to address the financial crisis-reflects increased political competition and greater emphasis on legal as opposed to reputational systems of economic ordering in that country. This paper discusses pricing methods, comments on matters of concern in market risk management, and analyzes market characteristics of convertible bonds.

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    File URL: http://www.imes.boj.or.jp/research/papers/english/me17-2-2.pdf
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    Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

    Volume (Year): 17 (1999)
    Issue (Month): 2 (August)
    Pages: 21-46

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    Handle: RePEc:ime:imemes:v:17:y:1999:i:2:p:21-46
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    1. 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.
    2. Joe Peek & Eric S. Rosengren, 1998. "Determinants of the Japan premium: actions speak louder than words," Working Papers 98-9, Federal Reserve Bank of Boston.
    3. D. E. Moggridge, 1995. "Comment," History of Political Economy, Duke University Press, vol. 27(5), pages 87-91, Supplemen.
    4. Lohmann, Susanne, 1997. "Is Japan Special? Monetary Linkages and Price Stability," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 15(2), pages 63-79, December.
    5. Thomas F. Cargill & Michael M. Hutchison & Takatoshi Ito, 1997. "The Political Economy of Japanese Monetary Policy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262032473, June.
    6. Asli Demirgüç-Kunt & Enrica Detragiache, 1997. "The Determinants of Banking Crises; Evidence From Developing and Developed Countries," IMF Working Papers 97/106, International Monetary Fund.
    7. Masaharu Hanazaki & Akiyoshi Horiuchi, 1998. "A Vacuum of Governance in the Japanese Bank Management," CIRJE F-Series CIRJE-F-29, CIRJE, Faculty of Economics, University of Tokyo.
    8. Akiyoshi Horiuchi, 1998. "Financial Fragility in Japan: A Governance Issue," CIRJE F-Series CIRJE-F-5, CIRJE, Faculty of Economics, University of Tokyo.
    9. White, Eugene, 1995. "Deposit insurance," Policy Research Working Paper Series 1541, The World Bank.
    10. Frederic S. Mishkin, 1996. "Understanding Financial Crises: A Developing Country Perspective," NBER Working Papers 5600, National Bureau of Economic Research, Inc.
    11. Edward J. Kane, 1988. "Changing incentives facing financial-services regulators," Proceedings, Federal Reserve Bank of Cleveland, pages 265-279.
    12. Caprio, Gerard Jr. & Klingebiel, Daniela, 1996. "Bank insolvencies : cross-country experience," Policy Research Working Paper Series 1620, The World Bank.
    13. Calomiris, Charles W., 1990. "Is Deposit Insurance Necessary? A Historical Perspective," The Journal of Economic History, Cambridge University Press, vol. 50(02), pages 283-295, June.
    14. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
    15. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
    16. Miller, Geoffrey P., 1996. "Is deposit insurance inevitable? Lessons from Argentina," International Review of Law and Economics, Elsevier, vol. 16(2), pages 211-232, June.
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