Resolving a Banking Crisis: What Worked in New England

by John S. Jordan
September/October1998

Many Asian economies are now experiencing economic hardship, their troubles stemming in part from crises in their banking sectors. Given the important role the banking sector plays in these economies, resolution of their banking crises is a vital first step toward resuming economic growth. Unfortunately, the steps taken so far appear inadequate, and many observers compare current attempts to those of U.S. regulators during our initial efforts to resolve the S&L crisis. Given the lengthy time it took and the high cost of the taxpayer-supported resolution, this is not a comparison the Asian countries should welcome.

The six New England states also experienced a severe banking crisis, losing more than 15 percent of their banks in the early 1990s. The New England crisis was resolved at far less cost and in a much more timely manner than the S&L crisis. This article examines the behavior and interactions of bankers, regulators, and market participants during the crisis. The author finds that failing New England banks, in their final years, did not increase the riskiness of their operations in a last-chance effort to salvage their firms. Strict regulatory oversight, public disclosure of banking problems, and market discipline also contributed to the success of the resolution.

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