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How to Restructure Failed Banking Systems: Lessons from the U.S. in the 1930's and Japan in the 1990's

  • Charles Calomiris
  • Joseph R. Mason

The costs of government assistance to banks depend on the way rescues are managed. The cnetral questions of policy reference do not revolve around whether to bail out banks, but rather around the choice of which banks to rescue and the means for doing so. If a rescue is handled skillfully, the cost can be greatly reduced. The history of assistance to U.S. banks during the Great Depression illustrates these themes well, and can provide useful lessons for Asia today. This paper reviews the history of bank distress and assistance in the United States during the 1930's and examines in detail the role of the Reconstruction Finance Corporation - how it targeted banks, the effect of its assistance, the cost of providing assistance, and the way that it tried to align bank incentives to protect against abuse of government protection. Then, the paper contrasts that experience with the recent government loans and preferred stock purchases for Japanese banks. We argue that combining subsidized preferred stock purchases with mandatory matching contributions of common stock, limits on bank dividend payments, and reforms on bank capital regulation that credibly incorporate market discipline into the regulatory process would increase the benefits and reduce the costs of government support for banks.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9624.

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Date of creation: Apr 2003
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Publication status: published as Ito, Takatoshi and Anne Krueger (eds.) Governance, Regulation, and Privatization in the Asia-Pacific Region National Bureau of Economic Research. University of Chicago Press, 2004.
Handle: RePEc:nbr:nberwo:9624
Note: DAE ME
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  1. Charles W. Calomiris & David C. Wheelock, 1997. "Was the Great Depression a Watershed for American Monetary Policy?," NBER Working Papers 5963, National Bureau of Economic Research, Inc.
  2. Cull, Robert & Senbet, Lemma W. & Sorge, Marco, 2001. "Deposit insurance and financial development," Policy Research Working Paper Series 2682, The World Bank.
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  13. Ali Anari & James Kolari & Joseph Mason, 2002. "Bank Asset Liquidation and the Propagation of the U.S. Great Depression," Center for Financial Institutions Working Papers 02-35, Wharton School Center for Financial Institutions, University of Pennsylvania.
  14. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
  15. Liliana Rojas-Suarez, 2001. "Rating Banks in Emerging Markets: What Credit Rating Agencies Should Learn from Financial Indicators," Working Paper Series WP01-6, Peterson Institute for International Economics.
  16. Charles Calomiris & Mark Carey, 1994. "Loan market competition between foreign and U.S. banks: some facts about loans and borrowers," Proceedings 38, Federal Reserve Bank of Chicago.
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  20. John H. Boyd & Pedro Gomis & Sungkyu Kwak & Bruce D. Smith, 2000. "A User's Guide to Banking Crises," Monash Economics Working Papers archive-36, Monash University, Department of Economics.
  21. Charles W. Calomiris & Gary Gorton, . "The Origins of Banking Panics: Models, Facts, and Bank Regulation," Rodney L. White Center for Financial Research Working Papers 11-90, Wharton School Rodney L. White Center for Financial Research.
  22. Charles W. Calomiris & Joseph R. Mason, 2003. "Fundamentals, Panics, and Bank Distress During the Depression," American Economic Review, American Economic Association, vol. 93(5), pages 1615-1647, December.
  23. Joseph Mason, 2001. "Do Lender of Last Resort Policies Matter? The Effects of Reconstruction Finance Corporation Assistance to Banks During the Great Depression," Journal of Financial Services Research, Springer, vol. 20(1), pages 77-95, September.
  24. Sheard, Paul, 1989. "The main bank system and corporate monitoring and control in Japan," Journal of Economic Behavior & Organization, Elsevier, vol. 11(3), pages 399-422, May.
  25. Charles W. Calomiris & Eugene N. White, 1994. "The Origins of Federal Deposit Insurance," NBER Chapters, in: The Regulated Economy: A Historical Approach to Political Economy, pages 145-188 National Bureau of Economic Research, Inc.
  26. 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.
  27. Gorton, Gary & Pennacchi, George, 1990. " Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March.
  28. Calomiris, Charles W., 1999. "Building an incentive-compatible safety net," Journal of Banking & Finance, Elsevier, vol. 23(10), pages 1499-1519, October.
  29. 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.
  30. Haubrich, Joseph G., 1990. "Nonmonetary effects of financial crises : Lessons from the great depression in Canada," Journal of Monetary Economics, Elsevier, vol. 25(2), pages 223-252, March.
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