Research Handbook on International Financial Regulation
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Research Handbook on International Financial Regulation

Edited by Kern Alexander and Rahul Dhumale

The globalisation of financial markets has attracted much academic and policymaking commentary in recent years, especially with the growing number of banking and financial crises and the current credit crisis that has threatened the stability of the global financial system. This major Research Handbook sets out to address some of the fundamental issues in financial regulation from a comparative and international perspective and to identify some of the main research themes and approaches that combine economic, legal and institutional analysis of financial markets.
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Chapter 13: Lessons from Japan’s Banking Crisis – 1991 to 2005

Mariko Fujii and Masahiro Kawai


Mariko Fujii and Masahiro Kawai1 Editors’ abstract: Professors Mariko Fujii and Masahiro Kawai show how the bursting of the Japanese asset price bubble in the early 1990s damaged Japanese bank balance sheets, and the subsequent delay by Japanese policymakers in recognising the severity of the impact of the asset price collapse on non-performing loans and the real economy contributed significantly to the duration of the crisis. They critically review the Japanese response to the crisis. It was not until well into the crisis that Japan adopted adequate measures, including a legal framework for resolving distressed banks, a recapitalisation of weak but viable banks, tighter non-performing loan classifications, and creating new institutions for corporate debt restructuring. The authors argue that acknowledging the extent and depth of bank balance sheet weaknesses is the first step towards resolving a banking crisis and that it is necessary to remove impaired assets from bank balance sheets, which may require a government-funded asset management company to purchase such troubled assets. The chapter also compares the response of US authorities to the 2007–08 credit crisis and in particular shows how the Target Asset Liquidity Fund (TALF) was inadequate in bringing liquidity to the wholesale debt markets and how more stringent measures are needed for US authorities to induce banks to remove non-performing loans from their balance sheets. An important lesson for US and other policymakers experiencing a banking crisis is that when authorities do not address banking sector problems promptly, the crisis may be prolonged and...

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