The New Main Bank System

Abstract:     
We develop a main bank model where the main bank decides whether or not to raise additional funds from the capital market to continue to invest in a borrowing firm when nonmain banks withdraw funds. We show that the threat of withdrawal of nonmain banks is more likely not only to force the main bank to perform efficiently in handling troubled loans, thereby preventing problems with zombie firms, but also to undertake information acquisition if the potential cash flow (liquidation value) of the firm decreases (increases) relative to the amount funded by nonmain banks and if the likelihood of firm success decreases. The theoretical results provide both efficiency evaluations for the renewal of the main bank relation in Japan after the end of the 1990s and empirical implications for the renewed main bank system.

Number of Pages in PDF File: 47

Keywords: liquidity, main bank, zombie firms

JEL Classification: D82, D86, G21, G23, G24, G33

working papers series