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The evolution of "too-big-to-fail" policy in Japan: evidence from market equity values

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Author Info

  • Mark M. Spiegel
  • Nobuyoshi Yamori

Abstract

This paper examines the evidence in bank equity markets concerning bank regulatory policies in Japan over the turbulent 1995-1998 period. We find that investors grouped banks according to regulatory status in assessing whether a bank was currently treated as "too-big-to-fail." when a failure of a bank of certain regulatory status was announced, excess returns on other banks of that regulatory status and below displayed heightened sensitivity to adverse news. This suggests that investors updated their beliefs about which classes of banks were protected by too-big-to-fail policies over the course of the sample. The pattern that emerges suggests that government officials pursued a policy of "regulatory triage," where initially Credit Cooperatives, then Second Regional banks, then First Regional banks, and finally City banks were allowed to fail.

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series with number 00-01.

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Date of creation: 2000
Date of revision:
Handle: RePEc:fip:fedfpb:00-01

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Keywords: Banks and banking - Japan ; Bank failures ; Bank supervision;

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References

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  1. Spiegel, Mark M., 2000. "Bank Charter Value and the Viability of the Japanese Convoy System," Journal of the Japanese and International Economies, Elsevier, vol. 14(3), pages 149-168, September.
  2. Joe Peek & Eric S. Rosengren, 1999. "Determinants of the Japan Premium: Actions Speak Louder Than Words," NBER Working Papers 7251, National Bureau of Economic Research, Inc.
  3. Larry D. Wall, 2010. "Too-big-to-fail after FDICIA," Economic Review, Federal Reserve Bank of Atlanta.
  4. Black, Harold A & et al, 1997. "Changes in Market Perception of Riskiness: The Case of Too-Big-to-Fail," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 20(3), pages 389-406, Fall.
  5. Nobuyoshi Yamori, 1999. "Contagion effects of bank liquidation in Japan," Applied Economics Letters, Taylor & Francis Journals, vol. 6(11), pages 703-705.
  6. Yamori, Nobuyoshi & Murakami, Akinobu, 1999. "Does bank relationship have an economic value?: The effect of main bank failure on client firms," Economics Letters, Elsevier, vol. 65(1), pages 115-120, October.
  7. Aharony, Joseph & Swary, Itzhak, 1996. "Additional evidence on the information-based contagion effects of bank failures," Journal of Banking & Finance, Elsevier, vol. 20(1), pages 57-69, January.
  8. Elijah Brewer, III & Hesna Genay & William C. Hunter & George G. Kaufman, 1999. "Does the Japanese stock market price bank risk? evidence from bank failures," Proceedings 638, Federal Reserve Bank of Chicago.
  9. Robert L. Hetzel, 1991. "Too big to fail : origins, consequences, and outlook," Economic Review, Federal Reserve Bank of Richmond, issue Nov, pages 3-15.
  10. Hesna Genay, 1999. "Japanese banks and market discipline," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue Aug.
  11. Mark M. Spiegel, 1999. "Moral hazard under the Japanese "convoy" banking system," Economic Review, Federal Reserve Bank of San Francisco, pages 3-13.
  12. Nobuyoshi Yamori, 1999. "Stock Market Reaction to the Bank Liquidation in Japan: A Case for the Informational Effect Hypothesis," Journal of Financial Services Research, Springer, vol. 15(1), pages 57-68, February.
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Citations

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Cited by:
  1. Mark M. Spiegel & Nobuyoshi Yamori, 2000. "Financial turbulence and the Japanese main bank," Pacific Basin Working Paper Series 2000-04, Federal Reserve Bank of San Francisco.
  2. Rixtel, Adrian van & Wiwattanakantang, Yupana & Souma, Toshiyuki & Suzuki, Kazunori, 2002. "Banking in Japan: Will "Too Big To Fail" Prevail?," CEI Working Paper Series 2002-16, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  3. Spiegel, Mark M. & Yamori, Nobuyoshi, 2003. "The impact of Japan's financial stabilization laws on bank equity values," Journal of the Japanese and International Economies, Elsevier, vol. 17(3), pages 263-282, September.
  4. Masami Imai, 2006. "The Emergence of Market Monitoring in Japanese Banks: Evidence from the Subordinated Debt Market," Wesleyan Economics Working Papers 2006-008, Wesleyan University, Department of Economics.
  5. Elijah Brewer, III & Hesna Genay & George G. Kaufman, 2003. "Banking relationships during financial distress: the evidence from Japan," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 2-18.
  6. Phil Molyneux & Klaus Schaeck & Tim Zhou, 2011. "‘Too Systemically Important to Fail’ in Banking," Working Papers 11011, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
  7. Elijah Brewer, III & Hesna Genay & William Curt Hunter & George G. Kaufman, 2002. "The value of banking relationships during a financial crisis: evidence from failures of Japanese banks," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
  8. Masami Imai, 2006. "Market Discipline and Deposit Insurance Reform in Japan," Wesleyan Economics Working Papers 2006-007, Wesleyan University, Department of Economics.
  9. Brewer, Elijah III & Genay, Hesna & Hunter, William Curt & Kaufman, George G., 2003. "The value of banking relationships during a financial crisis: Evidence from failures of Japanese banks," Journal of the Japanese and International Economies, Elsevier, vol. 17(3), pages 233-262, September.
  10. Elijah Brewer, III & Hesna Genay & William Curt Hunter & George G. Kaufman, 2002. "The value of banking relationships during a financial crisis: evidence from failures of Japanese banks," Working Paper Series WP-02-20, Federal Reserve Bank of Chicago.
  11. Elijah Brewer, III & Hesna Genay & William Curt Hunter & George G. Kaufman, 2002. "The value of banking relationships during a financial crisis: evidence from failures of Japanese banks," Pacific Basin Working Paper Series 2002-09, Federal Reserve Bank of San Francisco.

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