Asset price bubbles have been and continue to be an area of major public policy concern in many countries. But while we know that the bursting of such bubbles is exceedingly painful and destructive to the economy, little is known of their causes. Indeed, there is little agreement even on the definition of a bubble and whether, whatever it is, is economically rational or irrational and reflect temporary excessive exuberance. Can bubbles be identified ex-ante before they burst? Often, one person's perceived bubble is another's perceived equilibrium price path. How and when is a bubble recognized? Should asset prices be a concern for monetary or fiscal policy makers and, if so how and when should policy-makers act? Should monetary policy attempt to target and stabilize asset prices the same as product prices? Should monetary policy act quickly at the beginning of the bubble or wait until the perceived bubble has been underway for some time? For how long? Will bubble restraining policies burst a bubble? Would it have burst on it's own? How can the damage done after bubbles be minimized? Does the experience of the U.S. in the 1920s and of Japan in the 1990s provide any lessons and guidelines for these and other countries in the 2000s?

The papers in this volume examine these and other aspects of asset price bubbles from the perspective of different times and different countries. The authors are experts who represent different countries, different economic philosophies, and different backgrounds - academic, government, bank regulatory agency and private. As a result, the papers add greatly to our storehouse of knowledge about asset price bubbles and hopefully will continue to moresuccessful public and private policies for restraining both the bubbles and their consequences and improving economic welfare.

In December 1991, the U.S. Congress enacted and President George Bush signed the Federal Deposit Insurance Corporation Improvement Act (FDICIA). The Act was motivated by the severity of the U.S. banking and thrift crisis of the 1980s and represented the most important banking legislation since the Banking (Glass-Steagall) Act, which was enacted in 1933 at the depth of the previous most severe banking crisis in U.S. history. Between 1980 and 1991, some 1,500 commercial and savings banks, representing 10 percent of the industry in 1980, failed and more than 1,000 savings and loan associations, representing 25 percent of the industry, failed. In addition, delays in resolving the failures helped to increase the cost beyond the resources of the then Federal Savings and Loan Insurance Corporation (FSLIC) and required the taxpayers to pay some $150 billion To insured depositors at these institutions. The large number and high cost of the failures were in large measure attributable to serious flaws in the extant government-sponsored deposit insurance program that encouraged insured institutions to assume excessive credit and interest rate risks and bank regulators to delay imposing corrective sanctions on troubled institutions and resolving economically insolvent institutions.

FDICIA attempted to correct these flaws by reforming the deposit insurance structure through requiring regulatory prompt corrective action (PCA) and least cost resolution (LCR). PCA mandated a series of both discretionary and mandatory sanctions that the regulators first may and then must apply as an institutions's financial health progressively deteriorates as reflected in a number of capital-to-assetratios. These sanctions are intended to encourage the institutions to reverse their deterioration before it is too late. But if they fail to do so, PCA requires resolution of the institution before their book-value capital is fully depleted. This is intended to minimize any losses from failure.

The designed PCA sanctions are modelled after the actual sanctions that the private market typically imposes on troubled firms in uninsured industries and that are distorted in banking by the government-provided insurance. Thus, FDICIA attempts to supplement regulatory and supervisory discipline with stimulated market discipline.

Since its introduction in the United States in 1991, PCA has been explicitly or implicity adopted in word if not spirit in many developed and developing countries with greatly different banking and regulatory structures. How well has it worked or could it work? The papers also consider reinforcing or alternative prudential techniques. Thus, they add to our storehouse of knowledge on improving the performance of banking systems and should prove useful to researchers, practioners, and policy-makers both in evaluating extant regulatory structures and in designing new or modified structures. All the papers were presented by the authors and commented on by the discussants at invited sessions at the annual meeting of the Western Economic Association in Seattle, Washington in July 2002. Maia Pykina (Loyola University Chicago) provided assistance both in arranging the session programs and in preparing the papers for publications.

This volume focuses on current problems in banking that have the potential not only for disrupting the smooth provision of banking and other financial services, but also for adversely affecting domestic and even international macroeconomic activity. Because serious banking problems have been experienced in most countries in recent years, the papers both focus on fragility and regulation in different countries and are authored by leading financial economists in six different countries including Belgium, Germany, Italy, The Netherlands, the United Kingdom and the United States. By providing an international perspective, the papers provide insights into the commonality of banking problems in different countries and the role of regulation both in attempting to prevent and in potentially, albeit unintentionally, encouraging bank crises. As such, the papers add to our storehouse of knowledge on the causes, symptoms, and consequences of banking problems across countries.