Big Bang, Bailouts and Bank Failures : A Study of Japanese Government Intervention During the 1990’s Banking Crisis and Parallels with the 2007-09 US Subprime Mortgage Crisis

Abstract: The current financial crisis the US and the world finds itself embroiled in has all of the markings of a once-in-a-generation type of economic contraction. In times like these, it is natural to search for comparable frames of reference; Japan’s own banking crisis during the “lost decade” of the 1990’s provides significant parallels to the current state of affairs. Given the severity and relative recentness of the Japanese crisis, the policy levers implemented by the Japanese authorities in response hold considerable interest as US policymakers struggle to grapple with the present crisis. The 1996 implementation of Japanese Big Bang, nomenclature for sweeping financial sector reforms, bestowed upon Japanese authorities significant powers to either bailout troubled financial institutions or outright let them fail. The cases of Yamaichi Securities and the Long-Term Credit Bank of Japan, two casualties of the Japanese crisis, are examined in the context of these powers and compared to two similar US cases, Lehman Brothers and Fannie Mae. Market responses from the Yamaichi and LTCB cases suggest that clearly communicated actions taken by the Japanese authorities helped instill confidence and facilitate recovery in the financial sector, despite criticism leveled at the time. As such, key takeaways from the Japanese experience may provide a template for solving aspects of the current US-led financial crisis.