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A Harmful Guarantee? The 1983 Israel Bank Shares Crisis Revisited

Author

Listed:
  • Asher A. Blass

    (Bank of Israel)

  • Richard S. Grossman

    (Wesleyan University)

Abstract

In a recent verdict (subsequently overturned in part by the Israel Supreme Court), an Israeli Court found that in the early 1980's Israeli banks, representing 95 percent of commercial banking, were guilty of providing shareholders with fraudulent guarantees that share prices would rise indefinitely, that they harmed banking stability and caused the government to take­over the banks. We use high frequency price data to identify whether a guarantee was, indeed, provided. We also compare 1993 bank share prices after the banks were partially re­listed with 1983 pre­crisis prices. The figures indicate that 1993 time­adjusted market values were $10 billion lower than in 1983, a decline borne by two groups of shareholders: pre­crisis shareholders ($4 billion) and the government which became the sole shareholder in 1983 ($6 billion).

Suggested Citation

  • Asher A. Blass & Richard S. Grossman, 1996. "A Harmful Guarantee? The 1983 Israel Bank Shares Crisis Revisited," Bank of Israel Working Papers 1996.03, Bank of Israel.
  • Handle: RePEc:boi:wpaper:1996.03
    as

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    File Function: First version, 1996
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    References listed on IDEAS

    as
    1. King, Mervyn, 1994. "Debt deflation: Theory and evidence," European Economic Review, Elsevier, vol. 38(3-4), pages 419-445, April.
    2. Grossman Richard S., 1993. "The Macroeconomic Consequences of Bank Failures under the National Banking System," Explorations in Economic History, Elsevier, vol. 30(3), pages 294-320, July.
    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. Asquith, Paul & Mullins, David Jr., 1986. "Equity issues and offering dilution," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 61-89.
    Full references (including those not matched with items on IDEAS)

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