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

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Mark M. Spiegel
Nobuyoshi Yamori

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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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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
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Handle: RePEc:fip:fedfpb:00-01

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Keywords: Banks and banking - Japan Bank failures Bank supervision

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hesna Genay, 1999. "Japanese banks and market discipline," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue Aug. [Downloadable!]
  2. Joe Peek & Eric S. Rosengren, 1998. "Determinants of the Japan premium: actions speak louder than words," Working Papers 98-9, Federal Reserve Bank of Boston. [Downloadable!]
    Other versions:
  3. Mark M. Spiegel, 1999. "Moral hazard under the Japanese "convoy" banking system," Economic Review, Federal Reserve Bank of San Francisco, pages 3-13. [Downloadable!]
  4. 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. [Downloadable!] (restricted)
  5. 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. [Downloadable!] (restricted)
  6. repec:fip:fedreq:y:1991:i:nov/dec:p:3-15:n:v.77no.6 is not listed on IDEAS
  7. Larry D. Wall, 1993. "Too-big-to-fail after FDICIA," Economic Review, Federal Reserve Bank of Atlanta, issue Jan, pages 1-14.
  8. Mark M. Spiegel, 1999. "Bank charter value and the viability of the Japanese convoy system," Pacific Basin Working Paper Series 99-06, Federal Reserve Bank of San Francisco. [Downloadable!]
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  9. Yamori, Nobuyoshi, 1999. "Contagion Effects of Bank Liquidation in Japan," Applied Economics Letters, Taylor and Francis Journals, vol. 6(11), pages 703-05, November. [Downloadable!] (restricted)
  10. 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. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Mark M. Spiegel & Nobuyoshi Yamori, 2000. "Financial turbulence and the Japanese main bank," Pacific Basin Working Paper Series 00-04, Federal Reserve Bank of San Francisco. [Downloadable!]
  2. 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 02-09, Federal Reserve Bank of San Francisco. [Downloadable!]
  3. 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. [Downloadable!]
  4. Mark M. Spiegel & Nobuyoshi Yamori, 2002. "The impact of Japan’s financial stabilization laws on bank equity values," Proceedings, Federal Reserve Bank of San Francisco, issue Sep. [Downloadable!]
    Other versions:
  5. Masami Imai, 2006. "Market Discipline and Deposit Insurance Reform in Japan," Wesleyan Economics Working Papers 2006-007, Wesleyan University, Department of Economics. [Downloadable!]
  6. 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. [Downloadable!]
  7. Adrian van Rixtel & Yupana Wiwattanakantang & Toshiyuki Souma & Kazunori Suzuki, 2002. "Banking in Japan: Will "To Big To Fail" Prevail?," CEI Working Paper Series 2002-16, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  8. 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. [Downloadable!]
  9. 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. [Downloadable!]
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