Resolving a Banking Crisis: What Worked in New England

M any 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 to resolve their banking problems appear inadequate. 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 to resolve the S&L crisis and the high cost of a taxpayer-supported resolution , this is not a comparison the Asian countries should welcome. The S&L crisis, however, was not the only U.S. banking crisis resolved in recent years. The six New England states also experienced a severe banking crisis, losing more than 15 percent of their banks in the early 1990s. Unlike the S&L crisis, however, the New England crisis was resolved at far less cost and in a much more timely manner. In fact, just a few years after the crisis, the banking sector was healthy and profitable again and the region enjoyed a vibrant economic recovery. This paper examines the behavior and interactions of bankers, regulators, and market participants during the New England banking crisis, in order to determine what factors led to the relatively successful resolution of this banking crisis. 1 While the S&L crisis has been widely analyzed (for example, see Kane 1989b, Barth 1991, and White 1991), only sparse evidence is available on the resolution of New England's banking crisis. Studies of the S&L crisis examine the role that deposit insurance and regulatory forbearance played in that crisis, contending these policies contributed greatly to the cost of its resolution. Many argue that these policies allowed economically insolvent institutions to conceal the true extent of their weakness and to undertake a " go for broke " strategy in a last-ditch effort to salvage their institution. Did managers of failing New England banks undertake similar " go for broke " strategies in the years prior to