Will the U.S. Bank Recapitalization Succeed? Eight Lessons from Japan

Abstract

During the financial crisis that started in 2007, the U.S. government has used a variety of tools to try to rehabilitate the U.S. banking industry. Many of those strategies were used also in Japan to combat its banking problems in the 1990s. There are also a surprising number of other similarities between the current U.S. crisis and the recent Japanese crisis. The Japanese policies were only partially successful in recapitalizing the banks until the economy finally started to recover in 2003. From these unsuccessful attempts, we derive eight lessons. In light of these eight lessons, we assess the policies the U.S. has pursued. The U.S. has ignored three of the lessons and it is too early to evaluate the U.S. policies with respect to four of the others. So far the U.S. has avoided Japan's problem of having impaired banks prop up zombie firms.

Overcoming Adverse Selection: How Public Intervention Can Restore Market Functioning

“…The contemporaneous rescue plan in the UK was taken up mostly by the bad apples, with stronger banks (like Barclays) refinancing themselves in the marketplace. Similarly, the Japanese bailout experience in the 1990s was characterized by a substantial holdout problem (Takeo Hoshi and Anil Kashyap 2010). 2 Adverse selection is only one of several hypotheses for why markets froze in 2008.…”

“…Japanese banks is an interesting case in point (Hoshi-Kashyap 2010). This situation, in the absence of a market, has been studied in the literature, 40 and has been shown to lead to a slower revelation of information and equilibrium delays.…”

A panel study of zombie SMEs in Japan: Identification, borrowing and investment behavior

“…9 Access to the firm micro data used byMatsuura and Hori (2003) would enable them to calculate the zombie ratio of firms that utilized the special-credit guarantee system. 10 If the data had included failed firms, we could have checked whether the zombie ratio was higher than the current estimate Hoshi (2006). states that listed zombie firms tend to exit.…”

Japanese Financial Market Research: A Survey

“…Hoshi and Kashyap's () analysis of the Japanese banking crisis is extended to the US financial crisis that started in 2007, and offers some lessons on what to do and what not to do.…”