This paper examines episodes of banking sector distress for a large sample of countries, highlighting the experience of Japan. We estimate a model that links the onset of banking problems to a set of macroeconomic variables and institutional characteristics. The model predicts a high probability of banking sector distress in Japan in the early 1990s, matching actual developments closely, and suggests that the Japanese episode fits a well-established pattern characterizing banking sector problems elsewhere. An empirical model explaining the output cost of banking sector distress is also investigated. The results indicate that output loss is smaller the more quickly banking sector problems are resolved and when exchange. | Determinants, Costs, and Duration of Banking Sector Distress: The Japanese Experience in International Comparison October 8, 1998 Michael Hutchison and Kathleen McDill* Department of Economics Social Sciences 1 University of California, Santa Cruz Santa Cruz, CA 95064 USA email: hutch@ Abstract This paper examines episodes of banking sector distress for a large sample of countries, highlighting the experience of Japan. We estimate a model that links the onset of banking problems to a set of macroeconomic variables and institutional characteristics. The model predicts a high probability of banking sector distress in Japan in the early 1990s, matching actual developments closely, and suggests that the Japanese episode fits a well-established pattern characterizing banking sector problems elsewhere. An empirical model explaining the output cost of banking sector distress is also investigated. The results indicate that output loss is smaller the more quickly banking sector problems are resolved and when exchange rate stability is maintained. Explicit deposit insurance also appears to lessen the output cost of banking sector distress. The real output loss to Japan of not resolving banking sector problems is estimated at almost 1 percent of GDP annually. The authors thank the UC Pacific Rim Research Program, the International Centre for the Study of East Asian Development and the UCSC Committee on Research and Division of Social Sciences for financial support. This paper was prepared for presentation at the NBER-TCER Japan Project Meeting in Tokyo, October 29-30, 1998. 1. Introduction Recent events in Japan and East Asia draw renewed attention to the many problems associated with financial sector distress— how quickly and unexpectedly crisis situations arise, disruption in credit channels, economic contraction, and the difficulty in designing effective policy responses. Japan’s banking problem emerged gradually in the early 1990s and has since attracted .
