Determinants, Costs, and Duration of Banking Sector Distress: The Japanese Experience in International Comparison
UCSC Department of Economics Working Paper No. 421
29 Pages Posted: 12 Dec 1998
Date Written: November 1998
This paper examines episodes of banking sector distress for a large sample of countries, highlighting the experience of Japan. We estimate a model that links the onset 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, matching actual developments closely, and suggests that the Japanese episode fits a well-established pattern characterizing banking sector problems elsewhere. An empirical model explaining the output cost of banking sector distress is also investigated. The results indicate that output loss is smaller the more quickly banking sector problems are resolved and when exchange rate stability is maintained. Explicit deposit insurance also appears to lessen the output cost of banking sector distress. The real output loss to Japan of not resolving banking sector problems is estimated at almost one percent of GDP annually.
JEL Classification: G21, E44
Suggested Citation: Suggested Citation