One Objective, Two Strategic Tools: Government Direct Lending Versus Private Bank Recapitalization During a Banking Crisis

66 Pages Posted: 31 Jul 2018

See all articles by Ya Kang

Ya Kang

National University of Singapore (NUS)

Yupeng Lin

National University of Singapore

Anand Srinivasan

CAFRAL, Reserve Bank of India; National University of Singapore - Department of Finance

Date Written: July 27, 2018

Abstract

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

Suggested Citation

Kang, Ya and Lin, Yupeng and Srinivasan, Anand, One Objective, Two Strategic Tools: Government Direct Lending Versus Private Bank Recapitalization During a Banking Crisis (July 27, 2018). 31st Australasian Finance and Banking Conference 2018. Available at SSRN: https://ssrn.com/abstract=3222209

Ya Kang (Contact Author)

National University of Singapore (NUS) ( email )

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Yupeng Lin

National University of Singapore ( email )

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Anand Srinivasan

CAFRAL, Reserve Bank of India ( email )

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Mumbai, Maharashtra 400051
India

National University of Singapore - Department of Finance ( email )

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Singapore, 119245
Singapore

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