Deposit Insurance Regulatory forbearance and Economic Growth: Implications for the Japanese Banking Crisis
IMF Working Papers, August 1, 2005
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Bibliographic details
- Authors: Kenneth Kletzer, Robert Dekle
- Published: August 1, 2005
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451861884.001
Summary and central findings
- An endogenous growth model with financial intermediation demonstrates how deposit insurance and prudential regulatory forbearance lead to banking crises and growth declines.
- The model assumptions are based on features of the Japanese financial system and regulation.
- The model demonstrates how banking and growth crises can evolve under perfect foresight.
- The dynamics for economic aggregates and asset prices predicted by the model are shown to be generally consistent with the experience of the Japanese economy and financial system through the 1990s.
- The authors test the maintained hypothesis of rational expectations using asset price data for Japan over the 1980s and 1990s.
Model structure and assumptions
- Type: Endogenous growth model with financial intermediation.
- Key mechanisms explored:
- Deposit insurance effects on bank incentives and risk-taking.
- Prudential regulatory forbearance and its impact on bank behavior and asset prices.
- Interaction between banking sector dynamics and aggregate economic growth.
- Expectation framework: Perfect foresight and tests of rational expectations using historical asset price data.
Empirical consistency and tests
- Comparison period: Japanese economy and financial system through the 1990s.
- Data used for testing: Asset price data for Japan over the 1980s and 1990s.
- Result: Model-predicted dynamics for economic aggregates and asset prices are generally consistent with observed Japanese experience in the 1990s.
Policy implications and themes
- Deposit insurance combined with regulatory forbearance can create incentives that precipitate banking crises.
- Banking crises driven by these incentives can produce subsequent declines in economic growth.
- Implicit recommendation: Prudential regulation and the structure of deposit insurance interact with bank behavior and macroeconomic outcomes; reforms in these areas are central to preventing banking-induced growth downturns.
Publication and metadata
- Authors: Kenneth Kletzer, Robert Dekle
- Publication date: August 1, 2005
- Series: Working Paper No. 2005/169
- Issue: 169
- Volume: 2005
- Pages: 34
- DOI: https://doi.org/10.5089/9781451861884.001
- Stock No: WPIEA2005169
- ISBN: 9781451861884
- ISSN: 1018-5941
- Subjects: Bank credit, Banking, Banking crises, Deposit insurance, Financial crises, Financial institutions, Loans, Money, Stocks
- Keywords: Bank credit, bank dividend, bank equity ratio, bank financing, banking crises, banking sector, capital stock, Deposit insurance, East Asia, economic growth, insurance liability, Japanese economy, Loans, rate of interest, Stocks, withdrawal demand, WP
IMF Working Paper — "Deposit Insurance Regulatory forbearance and Economic Growth: Implications for the Japanese Banking Crisis" by Kenneth Kletzer and Robert Dekle, August 1, 2005.