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The Impacts Of "Shock Therapy" Under A Banking Crisis: Experiences From Three Large Bank Failures In Japan

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  • SHIN-ICHI FUKUDA
  • SATOSHI KOIBUCHI

Abstract

A bank failure can have various adverse consequences for the clients. The adverse impacts might, however, differ depending on who takes over the operation of the failed banks. In this paper, we show that how to manage the new banks is important in mitigating the short-run and long-run consequences of bank failures. In the analysis, we focus on clients of three large failed Japanese banks - Hokkaido Takushoku Bank, the Long-term Credit Bank of Japan (LTCB), and the Nippon Credit Bank. We examine when the number of bankruptcies increased and how the market valuation changed for the client firms after the banks' operations were taken over by new banks. As for the clients of LTCB, there were dramatic increases of bankruptcies in the short-run but the surviving clients showed significant recovery of their stock prices. In contrast, as for the clients of the other two banks, there was neither dramatic increase of bankruptcies nor significant recovery of their stock prices. The result implies that "shock therapy" or "soft budget constraints" had dramatically different consequences in solving bad loan problems in Japan.

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Bibliographic Info

Article provided by Japanese Economic Association in its journal Japanese Economic Review.

Volume (Year): 57 (2006)
Issue (Month): 2 ()
Pages: 232-256

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Handle: RePEc:bla:jecrev:v:57:y:2006:i:2:p:232-256

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  1. Berglof Erik & Roland Gerard, 1995. "Bank Restructuring and Soft Budget Constraints in Financial Transition," Journal of the Japanese and International Economies, Elsevier, vol. 9(4), pages 354-375, December.
  2. Titman, Sheridan, 1984. "The effect of capital structure on a firm's liquidation decision," Journal of Financial Economics, Elsevier, vol. 13(1), pages 137-151, March.
  3. Yamori, Nobuyoshi & Murakami, Akinobu, 1999. "Does bank relationship have an economic value?: The effect of main bank failure on client firms," Economics Letters, Elsevier, vol. 65(1), pages 115-120, October.
  4. Kang, Jun-Koo & Stulz, Rene M, 2000. "Do Banking Shocks Affect Borrowing Firm Performance? An Analysis of the Japanese Experience," The Journal of Business, University of Chicago Press, vol. 73(1), pages 1-23, January.
  5. Slovin, Myron B & Sushka, Marie E & Polonchek, John A, 1993. " The Value of Bank Durability: Borrowers as Bank Stakeholders," Journal of Finance, American Finance Association, vol. 48(1), pages 247-66, March.
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Cited by:
  1. Shin‐ichi Fukuda & Jun‐ichi Nakamura, 2011. "Why Did ‘Zombie’ Firms Recover in Japan?," The World Economy, Wiley Blackwell, vol. 34, pages 1124-1137, 07.
  2. Shin-ichi Fukuda & Munehisa Kasuya & Kentaro Akashi, 2007. "The Role of Trade Credit for Small Firms : An Implication from Japan’s Banking Crisis," Finance Working Papers 22596, East Asian Bureau of Economic Research.
  3. Shin-ichi Fukuda & Mariko Tanaka, 2013. "Financial Crises and Risk Premiums in International Interbank Markets," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 9(1), pages 117-138, January.
  4. Shin-ichi Fukuda & Munehisa Kasuya & Jouchi Nakajima, 2005. "Deteriorating Bank Health and Lending in Japan: Evidence from Unlisted Companies Undergoing Financial Distress (Subsequently published in "Journal of the Asia Pacific Economy" Vo.11, No.4, D," CARF F-Series CARF-F-042, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.

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