Will the US Bank Recapitalization Succeed? Lessons from Japan

December 15th, 2008

Takeo Hoshi and Anil K Kashyap
NBER Working Paper Series  ** updated version **

The U.S. government is using a variety of tools to try to rehabilitate the U.S. banking industry. The two principal policy levers discussed so far are employing asset managers to buy toxic real estate securities and making bank equity purchases. Japan used both of these strategies to combat its banking problems. 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. Hoshi and Kashyap explain why that was the case and then compare the current U.S. plans with those pursued in Japan. While the U.S. plans are still in flux, it appears that U.S. is at risk for running into some of the same problems that hobbled the Japanese policies.

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* This revised paper expands substantially on the analysis in an earlier version.