Negative Impacts of Capital Injection Policies on the Capital Crunch: Evidence from Japan

29 Pages Posted: 16 Nov 2012

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Date Written: November 14, 2012

Abstract

This paper empirically investigates the effects of capital injections into Japanese banks, which were based on the Financial Function Stabilization Law and the Early Strengthening Law, on the capital crunch. Using financial panel data for all of the Japanese commercial banks, we estimate dynamic panel models which investigate the effects of capital injections on banks’ lending behaviour. We find a negative impact of capital injections on their lending behaviour. This finding is different from that of previous studies, which concluded that capital injections had positive effects. Though the capital injections were expected to free banks from capital regulatory constraint, Japanese banks that had received capital injections became more sensitive about their capital adequacy ratios, and reduced their loans; the exception was the domestic banks that received capital injection based on the Early Strengthening Law. The difference between success and failure has a lot to do with the frameworks of capital injection policies, suggesting that the manner of conducting capital injection policies and banking supervision is a very crucial matter.

Keywords: Capital Injection, Capital Crunch, Basel Accord

JEL Classification: G21, G28, C23, E51

Suggested Citation

Osada, Takeshi, Negative Impacts of Capital Injection Policies on the Capital Crunch: Evidence from Japan (November 14, 2012). Proceedings of 19th International Business Research Conference 2012. Available at SSRN: https://ssrn.com/abstract=2175601 or http://dx.doi.org/10.2139/ssrn.2175601

Takeshi Osada (Contact Author)

Saitama University ( email )

Saitama City, Saitama 338-8570
Japan

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