How to Restructure Failed Banking Systems

Charles W. Calomiris and Joseph R. Mason

in Governance, Regulation, and Privatization in the Asia-Pacific Region

Published by University of Chicago Press

Published in print March 2004 | ISBN: 9780226386799
Published online February 2013 | e-ISBN: 9780226386966 | DOI:
How to Restructure Failed Banking Systems

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This chapter examines the policy issues arising from distressed banks: should they be rescued? On what terms should resources be transferred to banks? What lessons can be drawn from the experiences in the past (in particular those in the United States in the 1930s) for Japan and other Asian countries? The chapter is organized as follows. Section 14.2 reviews the history of bank distress and assistance in the United States during the 1930s and examines the role of the Reconstruction Finance Corporation—how it targeted banks, the effects 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. Section 14.3 contrasts that experience with the recent government loans and preferred stock purchases for Japanese banks. Section 14.4 concludes with some specific policy recommendations. It is argued that combining subsidized preferred stock purchases with mandatory matching contributions of common stock, limits on bank dividend payments, and reforms of 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. A commentary is also included at the end of the chapter.

Keywords: bank distress; banking industry; Reconstruction Finance Corporation; government loans; preferred stock purchases; Japanese banks; government support

Chapter.  16146 words.  Illustrated.

Subjects: Business and Management

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