Are All Banking Crises Alike? The Japanese Experience in International Comparison

Abstract

This paper examines episodes of banking sector distress for a large sample of developed and developing countries, highlighting the experience of Japan. By a host of criteria, Japan appeared to be in a stronger position than most countries at the onset of banking problems-low inflation, appreciating currency, balanced government budget, and large external surpluses. However, Japan followed a clear international boom-and-bust pattern in terms of real output growth, credit growth and stock price movements. We estimate a multivariate probit model that links the likelihood of banking problems to a set of macroeconomic variables and institutional characteristics. The model predicts a high probability of banking sector distress in Japan in the early 1990s. In particular, the likelihood of an episode of banking distress rose in line with the sharp drop in asset prices, deepening recession and "moral hazard" problem (financial liberalization combined with explicit deposit insurance). The Japanese case is also noteworthy by the long duration of the banking crisis, the length of the coincident recession and general malaise over the economy, the slow regulatory response, and the long delay in the commitment of public funds to re-capitalize the banking sector.

Banking regulation and the output cost of banking crises

“…Only a few empirical studies examine the relationship between deposit insurance and the degree to which economic contraction is induced or worsened by the disruption of banking systems (e.g., Hutchison and McDill, 1999;Hoggarth et al, 2005). These studies find that deposit insurance reduces the magnitude of output contraction associated with banking crises.…”

“…The quarterly real GDP is used for the output data. This estimation is a common measure used to capture the severity of a crisis in terms of output loss, which has been employed in many studies including Bordo et al (2001), Hutchison and McDill (1999), Hoggarth et al (2002) and Honohan and Klingebiel (2003). The output cost of banking crises calculated by this estimation technique should be viewed as the total magnitude of output cost 'associated' with crises, since crises could occur in a recession with the actual output being lower than the potential output trend for many years before the onset of crises.…”

Explaining bank distress in Eastern European transition economies

“…(5) Gonzalez-Hermosillo (1999): Bank Failure -the incidence of intervention; Distress -Coverage ratio, i.e ratio of capital equity and loan reserves minus nonperforming loans to total assets. (6) Demirgüc- Detragiache (1998, 1999), Hutchison and Mc-Dill (1999): Definition of (systemic) financial crisis based on Klingebiel (1996, 2003) and Lindgren et al (1996). For an episode to be classified as crisis at least one of following conditions must apply: (a) NPL to total banking sector assets above 10%; (b) Ratio of NPL to total assets greater than 2% of GDP; (c) The cost of rescue operation at least 2% of GDP; (d) Large scale nationalization; (e) Extensive bank runs; (f) Emergency measures applied such as deposit freezes, prolonged bank holidays, deposit guarantees.…”

Prediction of commercial bank failure via multivariate statistical analysis of financial structures: The Turkish case

“…Year )3 During the past two decades, many of developed and developing economies in the world experienced large scale of bank failures, and international average of bank restructuring costs estimates ranging from 6% to 10% of GDP (Hutchison and McDill, 1999).…”

“…Also, high real interest rates are clearly associated systemic banking sector problems (Demirg€ uc ß-Kunt and Detragiache, 1998). The moral hazard problem (financial liberalization combined with explicit deposit insurance and weak law enforcements) also increase probability of failure (Hutchison and McDill, 1999).…”