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Foreign direct investment and regulatory remedies for banking crises: Lessons from Japan

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  • Linda Allen

    (Bert W. Wasserman Department of Economics and Finance, Baruch College, City University of New York, USA)

  • Suparna Chakraborty

    (Bert W. Wasserman Department of Economics and Finance, Baruch College, City University of New York, USA)

  • Wako Watanabe

    (Faculty of Business and Commerce, Keio University, Tokyo, Japan)

Abstract

Can regulatory interventions alleviate financial crises? If so, which ones work? We draw inferences from the Japanese banking crisis of the 1990s using a hand-gathered database of bank loans gathered from original sources. Our results indicate that whereas risk-based capital infusions in Japan (similar to those following the 2009 Supervisory Capital Assessment Program (stress tests) in the US) were successful in stimulating aggregate lending by Japanese banks, earlier blanket infusions (comparable to the 2008 Troubled Asset Relief Program (TARP) in the US) were not effective. Moreover, changes in accounting rules in Japan that revalued bank assets (similar to the relaxation of mark-to-market requirements for banks in the US) did not increase aggregate Japanese bank lending, but rather reallocated it. Capital constraints during the crisis also induced many Japanese banks to close their overseas branches and switch their charters from international to domestic. This endogenous charter switch reversed the process of foreign direct investment (FDI) for many Japanese banks. Therefore we use the Japanese banking crisis as a natural experiment to test FDI theories and find empirical support for the relative access hypothesis, but not for the industrial organization approach or for the relative wealth hypothesis.

Suggested Citation

  • Linda Allen & Suparna Chakraborty & Wako Watanabe, 2011. "Foreign direct investment and regulatory remedies for banking crises: Lessons from Japan," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 42(7), pages 875-893, September.
  • Handle: RePEc:pal:jintbs:v:42:y:2011:i:7:p:875-893
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    Citations

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    Cited by:

    1. Nakashima, Kiyotaka, 2016. "An econometric evaluation of bank recapitalization programs with bank- and loan-level data," Journal of Banking & Finance, Elsevier, vol. 63(C), pages 1-24.
    2. Suparna Chakraborty & Joe Peek, 2016. "Lending to unhealthy firms in Japan during the lost decade: distinguishing between technical and financial health," Working Papers 16-22, Federal Reserve Bank of Boston, revised 01 Dec 2016.
    3. Nakashima, Kiyotaka & Takahashi, Koji, 2018. "The real effects of bank-driven termination of relationships: Evidence from loan-level matched data," Journal of Financial Stability, Elsevier, vol. 39(C), pages 46-65.
    4. Guizani, Brahim & Watanabe, Wako, 2016. "The effects of public capital infusions on banks’ risk-shifting to the deposit insurance system in Japan," Journal of Financial Stability, Elsevier, vol. 26(C), pages 15-30.
    5. P. Giannoccolo & J. M. Mansilla-Fernández, 2017. "Bank Restructuring, Competition, and Lending Supply: Evidence from the Spanish Banking Sector," Working Papers wp1113, Dipartimento Scienze Economiche, Universita' di Bologna.
    6. Ekman, Peter & Hadjikhani, Annoch Isa & Pajuvirta, Andreas & Thilenius, Peter, 2014. "Tit for tat and big steps: The case of Swedish banks’ internationalization 1961–2010," International Business Review, Elsevier, vol. 23(6), pages 1049-1063.
    7. Montgomery, Heather & Takahashi, Yuki, 2014. "The economic consequences of the TARP: The effectiveness of bank recapitalization policies in the U.S," Japan and the World Economy, Elsevier, vol. 32(C), pages 49-64.
    8. Zheying Wu & Robert Salomon, 2017. "Deconstructing the liability of foreignness: Regulatory enforcement actions against foreign banks," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 48(7), pages 837-861, September.
    9. Pierpaolo GIANNOCCOLO & José Manuel MANSILLA-FERNÁNDEZ, 2017. "Bank Restructuring, Competition, and Lending Supply: Evidence from the Spanish Banking Sector," Departmental Working Papers 2017-16, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    10. Sornette, Didier & Woodard, Ryan & Yan, Wanfeng & Zhou, Wei-Xing, 2013. "Clarifications to questions and criticisms on the Johansen–Ledoit–Sornette financial bubble model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(19), pages 4417-4428.
    11. Mike Mariathasan & Ouarda Merrouche, 2012. "Recapitalization, credit and liquidity," Economic Policy, CEPR;CES;MSH, vol. 27(72), pages 603-646, October.

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