chapter 18 appendix 2 banking crises throughout the world
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Chapter 18Appendix 2
Banking CrisesThroughout the
World
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Scandinavia
• Norway, Sweden, Finland─ Highly restrictive banking environments
• Only high quality loans• No expertise in screening and monitoring
─ Liberalization leads to lending boom─ Real estate collapses in late 1980s─ Bailout through early 1990s, large in scale
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Latin America
• Agentina in 2001─ Banks forced to buy gov’t debt─ Panic leads to bank runs─ Peso collapses, dollar-denominated debt doubles
in value─ Large losses, dwarfing GDP.
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Russia and Eastern Europe
• Soviet Union downfall leaves banks with no skills in screening and monitoring, little regulation
• Poor lending leads to loan losses─ 1993 - Hungarian banks with 25% of system
assets fail─ 1995 - interbank loan market seizes─ 1998 - Russia defaults on foreign debt
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Japan
• Started with heavy regulation• Lending boom in the 1980s, real estate in
particular• Real estate collapse in early 1990s results in
billions in bad loans• Several key banks fail in 1995-1997 period
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Japan
• At first, gov’t absorbed all losses, and 60 trillion yen package was created
• To receive funds, bank had to work with regulators – some chose not to
• Problems plagued economy through 2003• Late 2003 – bad loan rate declines, banks
shifting to profitability
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China
• Despite rapid economic growth, bad loans are estimated at $500 billion
• 1998 – gov’t injects $30 billion into four largest banks; another $170 billion 2000-2001; third bailout maybe another $200 billion
• Problems are state inefficiencies, new plan may call for bank privatization
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East Asia
• Thailand, Malaysia, Indonesia, Philippines, and South Korea─ Lending booms lead to loan losses─ Currency collapse follows (1997)─ 15% to 35% of banks fail─ Cost of bailout over 15% of GDP, as high as 50%
for Indonesia
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Other FDICIA Provisions
• Annual bank examinations• Give Fed greater resources / ability to
monitor foreign banks in the US• Increase reporting requirements
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Other Proposed Changes in Banking Regulation
• Regulatory Consolidation─ FDIC, OCC, Thrift Supervision, the Fed, and state
authorities regulate banks─ Attempt to consolidate in mid-1990s failed in
Congress, but will come up again
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Other Proposed Changes in Banking Regulation
• Market-Value Accounting for Capital─ Change book values to market values, possibly
for all assets and liabilities─ Some assets/debts difficult to value─ Cost / benefit of noisy estimates of value not
clear
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Overall Evaluation
• Changes are heading in the right direction• More needs to be done to improve
incentives for banks to take on less risk and hold more capital
• Eliminating deposit insurance and too-big-to-fail might be going too far
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