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Regulatory Remedies for Banking Crises: Lessons from Japan

52 Pages Posted: 12 Nov 2009  

Linda Allen

CUNY Baruch College

Suparna Chakraborty

University of San Francisco

Wako Watanabe

Keio University

Date Written: November 9, 2009

Abstract

In this paper, we utilize a hand gathered, bank specific database covering the period 1993 to 2007 to empirically examine the reactions of individual Japanese banks to governmental policies designed to end Japan’s financial crisis. Our unique database allows us to examine the composition of Japanese bank lending across three sectors (commercial and industrial lending, residential real estate and non-residential real estate), as well as aggregate lending activity. Our empirical results suggest that substantial risk-based capital infusions (similar to the 2009 stress tests in the US) were effective at stimulating aggregate bank lending activity, whereas regulatory forbearance (in the form of changes in accounting valuation procedures) had only allocative effects on bank lending activity. Our analysis indicates that across the board capital infusions (similar to the TARP capital infusions in October 2008) were ineffective in impacting bank lending activity during the Japanese financial crisis. Moreover, we find that regulatory capital was a binding constraint on Japanese banks, inducing some to switch their charter and abandon their international operations in order to reduce their capital requirements. We draw parallels to the public policy programs implemented in the US during the 2007-2009 financial crisis and conclude that policies must be substantial in size and risk targeted to be effective.

Keywords: banking crisis, capital interventions, public injections, accounting changes, bank lending

JEL Classification: G15, G21, G28

Suggested Citation

Allen, Linda and Chakraborty, Suparna and Watanabe, Wako, Regulatory Remedies for Banking Crises: Lessons from Japan (November 9, 2009). Available at SSRN: https://ssrn.com/abstract=1503000 or http://dx.doi.org/10.2139/ssrn.1503000

Linda Allen

CUNY Baruch College ( email )

Suparna Chakraborty (Contact Author)

University of San Francisco ( email )

2130 Fulton Street
San Francisco, CA 94117-1080
United States

HOME PAGE: http://chakrabortys.weebly.com

Wako Watanabe

Keio University ( email )

2-15-45 Mita
Minato-ku
Tokyo, 108-8345
Japan

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