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Big banking crises since the 1980s

Posted by Yogesh on Sunday, 28 September, 2008

The United States is grappling with a banking meltdown that has been described as the worst economic crisis since the Great Depression of the 1930s.

The Bush administration has proposed a $700 billion bailout on top of billions already spent or pledged to limit the damage from a series of big-name collapses on Wall Street.

As officials try to navigate the crisis, many are looking to the past for guidance. Following are synopses of four major crises since the 1980s.

CHINA WHAT HAPPENED
China’s banking problems were a legacy of state-directed lending that left banks saddled with a mountain of non-performing loans (NPLs) made on political not commercial grounds.

THE RESPONSE

Starting in 1998 China hived off the NPLs into four bad banks (asset management companies) and recapitalised three of the four big banks. The fourth, Agricultural Bank of China, is still awaiting restructuring.

China brought in foreign firms as investors, not so much for the cash as for the cachet ahead of possible listings, as well as for the management expertise they promised.

The cost of the bailout to date is estimated at $400-500 billion. The political nature of the problem and the degree to which China’s financial system is monopolised by state-owned banks mean the lessons for the United States are minimal.

JAPAN WHAT HAPPENED
Japan’s banks went into a tailspin in the 1990s after the country’s asset bubble burst. The Nikkei share average had more than doubled in two years to the end of 1989, then lost more than 60 percent over two years. Land prices peaked in 1991-1992, when it was said Japan’s land was worth more than the whole of the United States.Bad loans at Japanese banks snowballed as real estate values tumbled. In total, the banks have written off nearly 100 trillion yen ($944 billion) of bad loans from 1992 to 2007.

THE RESPONSE

The government injected some 12.4 trillion yen public funds to boost banks’ capital from 1998. In addition, Japan also spent 10.4 trillion yen to guarantee deposits and debentures of failed banks. The financial sector grew healthier after the government bailed out Resona Holdings, the country’s fourth-largest bank, by injecting almost 2.0 trillion yen in 2003. A stronger global economy supported the sector’s recovery.

SWEDEN WHAT HAPPENEDA decade of high inflation followed by banking deregulation led to a rapid surge in lending and a property price bubble. In the early 1990s, an attempt to defend Sweden’s currency led to a spike in interest rates, which at one point reached 500 percent. A real estate collapse left banks saddled with huge loan losses and the government was forced to step in.

THE RESPONSE

The government guaranteed deposits and bank debts, lending money to some banks and taking over others. Firms that were taken over were later privatised, although the state still owns 19.9 percent of Nordea, the region’s biggest bank. The government separated non-performing loans and asset holdings, hiving them off to management companies. These were sold off as the market recovered.

The crisis also led to an overhaul of fiscal and monetary policy, including the adoption of an inflation target. The government initially pumped in about 70 billion Swedish crowns ($11 billion) to the banking system. Estimates for total costs range from about 2 percent to 4 percent of gross domestic product. Some say the solution paid for itself in the long term.

UNITED STATES WHAT HAPPENEDIn 1980-1982, in an effort to make savings and loan institutions more competitive, the government allowed the so-called “thrifts” to enter new lines of business. Deposit insurance limits rose and thrifts were allowed to make consumer loans, issue credit cards and invest in commercial real estate loans. Tax incentives fuelled a construction boom while bank supervision was scaled back.

The industry took off, notably in Texas and California. In the mid-1980s, after declines in energy and real estate, many thrifts became insolvent though they were allowed to remain in business. By 1986, the thrift deposit insurance agency itself was insolvent. Government officials were reluctant to acknowledge public funds were needed, delaying a recovery.

THE RESPONSE

Congress at the end of the 1980s passed a law to bail out the industry, created the Resolution Trust Corp to resolve insolvent institutions and launched the Office of Thrift Supervision. From 1986 to 1989, the government closed or assisted 296 institutions with assets of $125 billion as many became insolvent because of unsound real estate and commercial loans.

More than 740 institutions were later closed or consolidated by the Resolution Trust Corp between 1989 and 1995, and their assets were liquidated, often for pennies on the dollar. The FDIC estimates the crisis cost some $153 billion, with taxpayers footing the bill for $124 billion. Other estimates have been as high as $300 billion.

Source Economic Times

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