Should Japanese Banks Be Recapitalized?

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Should Japanese Banks Be Recapitalized?

Author Info

Diamond, Douglas-W (U Chicago)

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Douglas W. Diamond

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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Publisher 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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Related research
Keywords:

Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

Cited by:
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Douglas W. Diamond, 2001. "Should banks be capitalized?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 71-96. [Downloadable!]
Douglas W. Diamond & Raghuram G. Rajan, 2000. "Banks, Short Term Debt and Financial Crises: Theory, Policy Implications and Applications," NBER Working Papers 7764, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- 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.
- Diamond, Douglas W. & Rajan, Raghuram G., 2001. "Banks, short-term debt and financial crises: theory, policy implications and applications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 54(1), pages 37-71, June. [Downloadable!] (restricted)
Douglas W. Diamond & Raghuram G. Rajan, 2002. "Liquidity Shortages and Banking Crises," NBER Working Papers 8937, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- Douglas W. Diamond & Raghuram G. Rajan, 2003. "Liquidity Shortages and Banking Crises," NBER Working Papers 10071, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
- 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. [Downloadable!] (restricted)
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. [Downloadable!]

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