What makes banking crisis resolution difficult? Lessons from Japan and the Nordic Countries

Banking crisis resolution is often a long-lasting process with large fiscal and social costs. We ask which difficulties authorities face when choosing and implementing resolution packages. We survey the literature analyzing the impact of single resolution instruments on moral hazard and fiscal costs. We argue that no best-practice resolution package exists and that the implementation of a package is subject to coordination failures. Since crisis resolution packages are country-specific, we follow a case-study approach and describe how regulators in Japan and the Nordic countries during the 1990s solved their financial crises. We identify several obstacles the authorities in these countries were faced with and analyse their crisis resolution in the context of moral hazard and fiscal costs. Finally, we use these lessons to reassess the policy reactions in the US and in Europe during the recent financial crisis. Copyright Eurasia Business and Economics Society 2015