Understanding the Rise and Decline of the Japanese Main Bank System: The Changing Effects of Bank Rent Extraction

Posted: 31 Jul 2012

See all articles by Xueping Wu

Xueping Wu

City University of Hong Kong (CityU) - Department of Economics & Finance

Jun Yao

Hong Kong Polytechnic University

Multiple version iconThere are 3 versions of this paper

Date Written: July 31, 2012

Abstract

This paper shows how main bank rent extraction affects corporate decisions about investment and financing during financial regulatory reform. Our model predicts that limited loanable funds can initially contain main bank controlled over-investment, even when new equity is available to the firm. Abundant funds facilitate over-investment to the detriment of firm profitability. A shift of control rights back to the firm due to financial deregulation produces an 'equity for upside potential and bank debt for downside risk' bias against the banks. A stock market and real estate boom in Japan made it harder than ever for the banks to diversify risk. The insights from this analysis help explain why Japan’s main bank system was beneficial in the (capital constrained) postwar period but became harmful during the (capital abundant and even bubbly) 1980s, and why the adverse shocks of the post-deregulation 1990s had such severe effects on the banking system.

Keywords: financial deregulation, main bank, rent extraction, investment efficiency, bank risk

JEL Classification: G21, G28, G30, G32

Suggested Citation

Wu, Xueping and Yao, Jun, Understanding the Rise and Decline of the Japanese Main Bank System: The Changing Effects of Bank Rent Extraction (July 31, 2012). Journal of Banking and Finance, Vol. 36, No. 1, 2012, Available at SSRN: https://ssrn.com/abstract=2120405

Xueping Wu (Contact Author)

City University of Hong Kong (CityU) - Department of Economics & Finance ( email )

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Kowloon
Hong Kong
+852 3442 7577 (Phone)
+852 3442 0195 (Fax)

HOME PAGE: http://personal.cityu.edu.hk/~efxpwu/

Jun Yao

Hong Kong Polytechnic University ( email )

Hung Hom, Kowloon
Hong Kong

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