One Objective, Two Strategic Tools: Government Direct Lending Versus Private Bank Recapitalization During a Banking Crisis
66 Pages Posted: 31 Jul 2018
Date Written: July 27, 2018
Using the Japanese banking crisis in late 1990s as a laboratory, this paper compares the marginal investment response to direct lending through government-owned banks (GOBs), and to indirect lending through recapitalized private banks. First we confirm that not only recapitalized private banks but also GOBs extend more loans after bank recapitalization. Second we provide evidence on the interaction of recapitalized private bank lending and government-owned bank lending for the first time. We discover a convergence of loan portfolios between the two banks following recapitalization. Finally we apply Structural Equation Model (SEM) to compare the marginal effect of different bank loans on firm investment, after taking into account their correlation. We discover that firm investment is nearly 5 times more sensitive to one-standard-deviation change in recapitalized PB lending, as opposed to that in GOB lending.
Keywords: Banking crisis; Recapitalization; Government-owned banks; Loan convergence
JEL Classification: E22; E44; G21; G28; L32
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