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Should Japanese Banks Be Recapitalized?

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  • Diamond, Douglas-W

    (U Chicago)

Abstract

When a bank is a relationship lender, its financial health affects the access to credit of its borrowers. If bank regulators or uninsured private depositors might force a bank to close, it will take any action necessary to remain open. This can lead to inefficient and excessive foreclosure of the bank's relationship-based loans to viable borrowers, or alternatively to the inability to collect existing loans due to its fear of recognizing an accounting loss if a loan is called. The level of bank capital then has real effects on its borrower's access to credit. A subsidized recapitalization of banks with relationship-based loans can be a good policy. The size of the recapitalization is critical, because providing too small an amount of subsidized capital can be worse than providing no capital. Providing subsidized capital to banks without relationship-based loans is never a good policy.

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Bibliographic Info

Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

Volume (Year): 19 (2001)
Issue (Month): 2 (May)
Pages: 1-19

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Handle: RePEc:ime:imemes:v:19:y:2001:i:2:p:1-19

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Cited by:
  1. Douglas W. Diamond & Raghuram G. Rajan, . "Banks, Short Term Debt and Financial Crises: Theory, Policy Implications and Applications."," CRSP working papers 518, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  2. Douglas W. Diamond & Raghuram G. Rajan, 2005. "Liquidity Shortages and Banking Crises," Journal of Finance, American Finance Association, vol. 60(2), pages 615-647, 04.
  3. Thomas Philippon & Vasiliki Skreta, 2010. "Optimal Interventions in Markets with Adverse Selection," NBER Working Papers 15785, National Bureau of Economic Research, Inc.
  4. Uesugi, Iichiro & Sakai, Koji & Yamashiro, Guy M., 2010. "The Effectiveness of Public Credit Guarantees in the Japanese Loan Market," Journal of the Japanese and International Economies, Elsevier, vol. 24(4), pages 457-480, December.
  5. Chris Chan & Danny Forwood & Heather Roper & Chris Sayers, 2009. "Public Infrastructure Financing: An International Perspective," Staff Working Papers 0902, Productivity Commission, Government of Australia.
  6. Hauck, Achim & Vollmer, Uwe, 2013. "Emergency liquidity provision to public banks: Rules versus discretion," European Journal of Political Economy, Elsevier, vol. 32(C), pages 193-204.
  7. Douglas W. Diamond, 2001. "Should banks be capitalized?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 71-96.
  8. Douglas W. Diamond & Raghuram G. Rajan, 2002. "Bank Bailouts and Aggregate Liquidity," American Economic Review, American Economic Association, vol. 92(2), pages 38-41, May.
  9. Kim, Yong Jin, 2008. "The role of corporate governance system in magnifying the impact of exogenous changes on the economy with self-fulfilling crises," Japan and the World Economy, Elsevier, vol. 20(4), pages 453-478, December.

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