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

See all articles by Suparna Chakraborty

Suparna Chakraborty

University of San Francisco

Linda Allen

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Date Written: February 2007

Abstract

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

Chakraborty, Suparna and Allen, Linda, Revisiting the Level Playing Field: International Lending Responses to Divergences in Japanese Bank Capital Regulations from the Basel Accord (February 2007). Available at SSRN: https://ssrn.com/abstract=963493 or http://dx.doi.org/10.2139/ssrn.963493

Suparna Chakraborty (Contact Author)

University of San Francisco ( email )

2130 Fulton Street
San Francisco, CA 94117-1080
United States

HOME PAGE: http://chakrabortys.weebly.com

Linda Allen

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States
646-312-3463 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://stern.nyu.edu/~lallen

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