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The Impacts of "Shock Therapy" on Large and Small Clients: Experiences from Two Large Bank Failures in Japan

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Author Info
Shin-ichi Fukuda
Satoshi Koibuchi

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Abstract

A “shock therapy” might have different impacts between large and small firms. In this paper, we focus on the clients of two large failed Japanese banks - the Long-term Credit Bank of Japan (LTCB) and the Nippon Credit Bank (NCB). We first show that subsequent events after the bank failures allowed the new LTCB to adopt a “shock therapy” but kept the new NCB to face “soft budget constraints”. We then show that the different therapies made performances of these two banks’ customers very different. Under the shock therapy, large firms showed significant recovery of their profits but small firms did not. In contrast, under the soft budget constraints, large firms did not show recovery and small firms experienced significant decline in their profits when the new bank terminated the banking relationship.

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Publisher Info
Paper provided by Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University in its series CEI Working Paper Series with number 2006-8.

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Date of creation: Oct 2006
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Handle: RePEc:hit:hitcei:2006-8

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Related research
Keywords: bank failure shock therapy soft budget constraints banking relationship

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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  1. Shin-ichi Fukuda & Satoshi Koibuchi, 2005. "The Impacts of "Shock Therapy" under a Banking Crisis : Experiences from Three Large Bank Failures in Japan," CIRJE F-Series CIRJE-F-351, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
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  2. Berglöf, Erik & Roland, Gérard, 1995. "Bank Restructuring and Soft Budget Constraints in Financial Transition," CEPR Discussion Papers 1250, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  3. Kang, Jun-Koo & Stulz, Rene M, 2000. "Do Banking Shocks Affect Borrowing Firm Performance? An Analysis of the Japanese Experience," Journal of Business, University of Chicago Press, vol. 73(1), pages 1-23, January. [Downloadable!] (restricted)
  4. Alan Ahearne & Naoki Shinada, 2005. "Zombie firms and economic stagnation in Japan," International Economics and Economic Policy, Springer, vol. 2(4), pages 363-381, December. [Downloadable!] (restricted)
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  5. Ricardo J. Caballero & Takeo Hoshi & Anil K. Kashyap, 2006. "Zombie Lending and Depressed Restructuring in Japan," NBER Working Papers 12129, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Hori, Masahiro, 2005. "Does bank liquidation affect client firm performance? Evidence from a bank failure in Japan," Economics Letters, Elsevier, vol. 88(3), pages 415-420, September. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
  8. Sekine, Toshitaka & Kobayashi, Keiichiro & Saita, Yumi, 2003. "Forbearance Lending: The Case of Japanese Firms," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(2), pages 69-92, August. [Downloadable!]
  9. 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)
  10. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January. [Downloadable!] (restricted)
  11. Dewatripont, M & Maskin, E, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Blackwell Publishing, vol. 62(4), pages 541-55, October. [Downloadable!] (restricted)
  12. Gibson, Michael S, 1995. "Can Bank Health Affect Investment? Evidence from Japan," Journal of Business, University of Chicago Press, vol. 68(3), pages 281-308, July. [Downloadable!] (restricted)
  13. Hoshi, Takeo & Kashyap, Anil & Scharfstein, David, 1990. "The role of banks in reducing the costs of financial distress in Japan," Journal of Financial Economics, Elsevier, vol. 27(1), pages 67-88, September. [Downloadable!] (restricted)
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  14. Michael W. Klein & Joe Peek & Eric S. Rosengren, 2002. "Troubled Banks, Impaired Foreign Direct Investment: The Role of Relative Access to Credit," American Economic Review, American Economic Association, vol. 92(3), pages 664-682, June. [Downloadable!] (restricted)
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  15. Joe Peek & Eric S. Rosengren, 2005. "Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan," American Economic Review, American Economic Association, vol. 95(4), pages 1144-1166, September. [Downloadable!] (restricted)
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  16. Hanazaki, Masaharu & Horiuchi, Akiyoshi, 2003. "A review of Japan's bank crisis from the governance perspective," Pacific-Basin Finance Journal, Elsevier, vol. 11(3), pages 305-325, July. [Downloadable!] (restricted)
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