'By a Silken Thread': Regional Banking Integration and Credit Reallocation during Japan’s Lost Decade

University of Zurich, Department of Economics, Working Paper No. 102, Revised version, 2017

52 Pages Posted: 28 Jan 2019

Date Written: March 2017

Abstract

During Japan’s ‘Lost Decade’, reallocation of credit through the internal capital markets of country-wide banks mitigated the real effects from the bank liqudity shock in prefectures with many bank-dependent SMEs. We document that the regional fragmentation of banking markets in Japan goes back to the institutions set up for silk export finance in the late 19th century. Using silk as an instrument for modern-day regional banking integration, we find even stronger evidence of credit reallocation than in our baseline OLS-specifications. The sign of this OLS-bias is consistent with the underlying heterogeneity in bank-firm matches implied by the theory.

Keywords: internal capital markets, Japan, Great Recession, Lost Decade, banking integration, financial development, regional business cycles, transmission of financial shocks, bank lending channel, firm-borrowing channel, reallocation channel, export finance, silk industry

JEL Classification: F36, F40, G01, N15, N25

Suggested Citation

Hoffmann, Mathias and Okubo, Toshihiro, 'By a Silken Thread': Regional Banking Integration and Credit Reallocation during Japan’s Lost Decade (March 2017). University of Zurich, Department of Economics, Working Paper No. 102, Revised version, 2017. Available at SSRN: https://ssrn.com/abstract=3318281 or http://dx.doi.org/10.2139/ssrn.3318281

Mathias Hoffmann (Contact Author)

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Toshihiro Okubo

Keio University ( email )

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

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