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Capital requirement and financial crisis: The case of Japan and the 1997 Asian crisis

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  • Brana, Sophie
  • Lahet, Delphine

Abstract

This study investigates the direct link between the implementation of the 1988 Basel capital requirement in Japan and the shrinkage of banks' foreign assets, particularly in Thailand in the 1990s. The empirical analysis proceeds in two stages. The first stage investigates the hypothesis that the capital crunch in Japan induced Japanese banks to alter their portfolios and reduce their foreign assets. The second step tests the hypothesis that the change in behaviour of the Japanese banks induced the increase of the probability of financial crisis in Asia. Our results support the responsibility of the Japanese capital requirement, among other factors, in triggering the 1997 Asian financial crisis as an external common shock and give a new angle on the financial crisis literature.

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Bibliographic Info

Article provided by Elsevier in its journal Japan and the World Economy.

Volume (Year): 21 (2009)
Issue (Month): 1 (January)
Pages: 97-104

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Handle: RePEc:eee:japwor:v:21:y:2009:i:1:p:97-104

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Web page: http://www.elsevier.com/locate/inca/505557

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Keywords: Asian financial crisis Japan Regulation Capital crunch Banks;

References

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  1. Takatoshi Ito & Yuri Nagataki Sasaki, 1998. "Impacts of the Basle Capital Standard on Japanese Banks' Behavior," Discussion Paper Series a356, Institute of Economic Research, Hitotsubashi University.
  2. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
  3. Reinhart, Carmen & Kaminsky, Graciela, 1998. "On crises, contagion, and confusion," MPRA Paper 13709, University Library of Munich, Germany.
  4. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  5. Yuzo Honda, 2002. "The effects of the Basle accord on bank credit: the case of Japan," Applied Economics, Taylor & Francis Journals, vol. 34(10), pages 1233-1239.
  6. Montgomery, Heather, 2005. "The effect of the Basel Accord on bank portfolios in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 19(1), pages 24-36, March.
  7. Natalia T. Tamirisa, 2004. "Do Macroeconomic Effects of Capital Controls Vary by their Type? Evidence From Malaysia," IMF Working Papers 04/3, International Monetary Fund.
  8. Joe Peek & Eric S. Rosengren, 1996. "The international transmission of financial shocks: the case of Japan," Working Papers 96-1, Federal Reserve Bank of Boston.
  9. Altman, Edward I. & Bharath, Sreedhar T. & Saunders, Anthony, 2002. "Credit ratings and the BIS capital adequacy reform agenda," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 909-921, May.
  10. Kirstein, Roland, 2000. "The New Basle Accord, Internal Ratings, and the Incentives of Banks," CSLE Discussion Paper Series 2000-06, Saarland University, CSLE - Center for the Study of Law and Economics.
  11. Concetta Chiuri, Maria & Ferri, Giovanni & Majnoni, Giovanni, 2002. "The macroeconomic impact of bank capital requirements in emerging economies: Past evidence to assess the future," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 881-904, May.
  12. Peek, Joe & Rosengren, Eric, 1995. "Bank regulation and the credit crunch," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 679-692, June.
  13. Pavan Ahluwalia, 1999. "Discriminating Contagion," IMF Working Papers 00/14, International Monetary Fund.
  14. Hall, B.J., 1993. "How Has the Basle Accord Affected Bank Portfolios?," Harvard Institute of Economic Research Working Papers 1642, Harvard - Institute of Economic Research.
  15. Altman, Edward I. & Saunders, Anthony, 2001. "An analysis and critique of the BIS proposal on capital adequacy and ratings," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 25-46, January.
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Cited by:
  1. Yilmaz, Ensar, 2009. "Capital accumulation and regulation," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 760-771, August.

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