1. Chapter 18 Appendix 2 Banking Crises Throughout the World

2. Copyright ©2015 Pearson Education, Inc. All rights reserved.18-1 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

3. Copyright ©2015 Pearson Education, Inc. All rights reserved.18-2 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.

4. Copyright ©2015 Pearson Education, Inc. All rights reserved.18-3 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

5. Copyright ©2015 Pearson Education, Inc. All rights reserved.18-4 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

6. Copyright ©2015 Pearson Education, Inc. All rights reserved.18-5 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

7. Copyright ©2015 Pearson Education, Inc. All rights reserved.18-6 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

8. Copyright ©2015 Pearson Education, Inc. All rights reserved.18-7 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

9. Copyright ©2015 Pearson Education, Inc. All rights reserved.18-8 Other FDICIA Provisions Annual bank examinations Give Fed greater resources / ability to monitor foreign banks in the US Increase reporting requirements

10. Copyright ©2015 Pearson Education, Inc. All rights reserved.18-9 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

11. Copyright ©2015 Pearson Education, Inc. All rights reserved.18-10 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

12. Copyright ©2015 Pearson Education, Inc. All rights reserved.18-11 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