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Requiem for market discipline and the specter of TBTF in Japanese banking

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  • Pop, Adrian
  • Pop, Diana
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    Abstract

    This study examines the reaction of private market participants to the enhancement of the "Too-Big-To-Fail" (TBTF) doctrine in the Japanese banking sector. The event justifying the use of the "TBTF" label occurred on May 17th, 2003, when the Japanese government decided to bailout Resona Holdings, the 5th largest financial group in the country. By using a sample of all Japanese listed banks and the standard event study methodology, we document significant and positive wealth effects in the stock market accruing to large banks and negative (though non-significant) effects accruing to smaller banks. Besides the effect on bank equity values, we also document a significant abnormal volume of trading on days following the bailout announcement date for the largest banks only. We extend our empirical analysis on stock prices and trading volumes by detecting a significant impact in the Credit Default Swap (CDS) market. This last result allows us to quantify, in a probabilistic sense, the effects of TBTF in addition to uncovering the mere presence of such a regulatory policy.

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    Bibliographic Info

    Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

    Volume (Year): 49 (2009)
    Issue (Month): 4 (November)
    Pages: 1429-1459

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    Handle: RePEc:eee:quaeco:v:49:y:2009:i:4:p:1429-1459

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    Web page: http://www.elsevier.com/locate/inca/620167

    Related research

    Keywords: Too-Big-To-Fail Market discipline Credit Default Swap Event study;

    References

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    Cited by:
    1. Nicolas Dumontaux & Adrian Pop, 2012. "Contagion Effects in the Aftermath of Lehman's Collapse: Measuring the Collateral Damage," Working Papers hal-00695721, HAL.

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