Myron Scholes
Global Markets Forum

November 11, 2008

Will The U.S. Bank ReCapitalization Work? Lessons from Japan

Having studied Japan’s financial crisis and long economic stagnation in detail, Anil Kashyap shed light on the U.S. problem by comparing U.S. policy responses to the current crisis with those previously tried in Japan. Although the two crises are different in important ways, including the larger scale in Japan’s case, “with each week that goes by, I see the differences becoming less important and the similarities becoming more so,” said Kashyap. In particular, the U.S. treasury department’s two preferred approaches to handling the crisis—purchasing bad assets and injecting capital into banks—repeats what Japan did a decade earlier.

Japan’s crisis, which also started with financial intermediaries and falling property prices, similarly reached a point (in 1997) at which several financial firms failed suddenly, and the government scrambled to shore up others. As in the United States, Japan faced the problem of getting some banks—which needed equity injections—to accept them without singling them out from stronger banks that did not need or want new capital.

The government also had to deal with mounting public anger over the cumulative injections of taxpayer money into the banking system to deal with the problem. As with the United States, Kashyap argued, Japan’s politicians faced great pressure to show that these bailouts also benefited “Main Street.” In Japan’s case, that included cajoling the banks to lend money to lots of small- and medium-sized enterprises and other nonfinancial employers, even though these loans did not make commercial sense. An important effect of this policy, Kashyap said, was that these weak firms continued to distort the competitive landscape in several domestic Japanese sectors, making it harder for more productive firms to expand and help the economy.

It is crucial, Kashyap said, to make sure that enough U.S. banks really do end up with enough capital to get the system working again, despite the public outcry, and regardless of whether the relevant banks resist raising more capital. Allowing them to continue paying dividends, for example, was a mistake, Kashyap said. Regarding nonfinancial firms that might be propped up for political reasons, Kashyap did not think U.S. banks would behave like those in Japan. “But,” he warned, “we might cut out the middleman and let the government do it.”

Coverage 

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Speaker Profiles

Anil K Kashyap, Edward Eagle Brown Professor of Economics and Finance, studies banking, business cycles, corporate finance, and monetary policy. He is the author and editor of three books and numerous peer-reviewed articles. His research has won him numerous awards, including a Sloan Research Fellowship, the Nikkei Prize for Excellent Books in Economic Sciences, and a Senior Houblon-Norman Fellowship from the Bank of England.

Prior to joining the faculty in 1991, Kashyap spent three years as an economist for the Board of Governors for the Federal Reserve System. He currently works as a consultant for the Federal Reserve Bank of Chicago, as well as a Research Associate for the National Bureau of Economic Research and advisor to the Cabinet Office of the Japanese Government's research project on "Japan's Bubble, Deflation and Long-term Stagnation."

Kashyap is one of the academic members of the Bellagio Group (whose non-academic members consist of the Deputy Central Bank Governors and Vice Ministers of Finance of the G7 countries). This experience, along with his research and other consulting and advising to central banks and finance ministries around the world, has helped him create his unique elective course, Understanding Central Banks.

Besides teaching and researching, Kashyap is co-organizer of the National Bureau of Economic Research's Working Group on the Japanese Economy, a member of both the American Economic Association and American Finance Association, and cofounder of the U.S. Monetary Policy Forum. He is one of the two faculty directors of Chicago Booth's Initiative on Global Markets.

He graduated from the University of California at Davis in 1982 with a bachelor's degree in economics and statistics with highest honors. In 1989, he earned a PhD from the Massachusetts Institute of Technology.

Sponsorship

This event is part of the Initiative on Global Markets and is generously sponsored by Myron Scholes.

The Initiative also receives financial support from the Chicago Mercantile Exchange (CME) Trust and our corporate partners: AQR Capital Management, Barclays Bank PLC, John Deere, and Northern Trust Corporation.


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