Overstating Moral Hazard: Lessons from Two Decades of Banking Crises

This paper surveyed approaches to the resolution of nonperforming loans in the context of major banking crises over the past two decades. It also explored particular country experiences and responses in-depth, including the effect of the Asian financial crisis on the banking sectors of the Republic of Korea, Indonesia, Malaysia and Thailand; the role of asset management companies in NPL resolution in the People’s Republic of China; measures taken to respond to systemic banking crises in Switzerland, the United Kingdom, and the United States following the global financial crisis; and the effects of the European sovereign debt crisis on the banking sectors of Greece, Ireland, Italy, and Spain. Based on historical and contemporary experiences, the paper assessed the effectiveness of tools for NPL resolution—including asset management companies, the restructuring of the balance sheets of major systemic banks, and large-scale bailouts in response to major crises—and drew lessons on the effective and efficient prudential regulation measures required to tackle NPLs during a banking crisis.