Revisiting the Level Playing Field: International Lending Responses to Divergences in Japanese Bank Capital Regulations from the Basel Accord
47 Pages Posted: 20 Feb 2007
Date Written: February 2007
The 1998 passage of the Land Revaluation Law in Japan provided regulatory forbearance to the Japanese banks in the form of a regulatory capital infusion. We test whether this divergence from international bank capital requirements had an impact on Japanese bank lending behavior. Because this natural experiment created an exogenous supply shock, we can utilize it to disentangle demand and supply effects in order to determine the impact on Japanese bank lending in both the US and Japan. We find that the infusion of regulatory capital had no aggregate impact on Japanese bank lending in Japan, but it did change the allocation of loans. Well capitalized Japanese banks shifted their lending from low margin, less capital intensive mortgage lending toward higher yielding, more capital intensive commercial loans. Moreover, we find evidence consistent with a shifting of Japanese bank lending activity away from US lending (which is primarily real estate based) to domestic lending to fund manufacturing. Thus, we find that divergences from international capital standards have significant allocative effects on lending, as well as on bank profitability.
Keywords: Basel, Land revaluation, International lending, allocative effects, aggregate effects
JEL Classification: E44, E65
Suggested Citation: Suggested Citation