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The International Transmission of Financial Shocks: The Case of Japan

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  • Joe Peek

    ()
    (Boston College)

  • Eric S. Rosengren

    (Federal Reserve Bank of Boston)

Abstract

One of the more dramatic financial events of the late 1980s and early 1990s was the surge in Japanese stock prices that was immediately followed by a very sharp decline of more than 50 percent. While the unprecedented fluctuations in Japanese stock prices were domestic financial shocks, the unique institutional characteristics of the Japanese economy produce a framework that is particularly suited to the transmission of such shocks to other countries through the behavior of the Japanese banking system. The large size of Japanese bank lending operations in the United States enables us to use U.S. banking data to investigate the extent to which this domestic Japanese financial shock was transmitted to the United States, as well as to identify a supply shock to U.S. bank lending that is independent of U.S. loan demand. We find that binding risk-based capital requirements associated with the decline in the Japanese stock market resulted in a decline in commercial lending by Japanese banks in the United States that was both economically and statistically significant. This finding has added importance given the severe real estate loan problems currently faced by Japanese banks. How Japanese bank regulators decide to resolve these problems will have significant implications for credit availability in the United States as well as in other countries with a significant Japanese bank presence.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 357.

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Length: 37 pages
Date of creation: Sep 1996
Date of revision:
Publication status: published, American Economic Review, 87:4, Sept. 1997.
Handle: RePEc:boc:bocoec:357

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  1. 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.
  2. Sun Bae Kim & Ramon Moreno, 1994. "Stock prices and bank lending behavior in Japan," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue feb11.
  3. Peek, Joe & Rosengren, Eric, 1995. "Bank regulation and the credit crunch," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 679-692, June.
  4. Peek, Joe & Rosengren, Eric, 1995. "The Capital Crunch: Neither a Borrower nor a Lender Be," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 625-38, August.
  5. Allen B. Frankel & Paul B. Morgan, 1992. "Deregulation and competition in Japanese banking," Proceedings 383, Federal Reserve Bank of Chicago.
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  8. Henry S. Terrell, 1993. "U.S. branches and agencies of foreign banks: a new look," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 913-925.
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  16. Jeremy C. Stein, 1998. "An Adverse-Selection Model of Bank Asset and Liability Management with Implications for the Transmission of Monetary Policy," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 466-486, Autumn.
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