Uncertainty, financial fragility and monitoring: Will Basle-type pragmatism resolve the Japanese banking crisis?
This paper argues that the naive adoption of an Anglo-American approach to the management of credit risk as the prescription for Japan's prolonged financial slump would amount to a very risky strategy. The neoclassical arguments for the adoption of Basle-type pragmatism and the adoption of Anglo-American financial norms neglect the important question of how to manage Japanese lenders' uncertainty, which affects their assessment of credit risk. We point out that an ill-planned transition without mechanisms for diversifying risk and uncertainty has encouraged herd behavior in lending. We also argue that Japan's traditional rent-based mode of financial intermediation and monitoring performed important functions, including the incubation of new enterprises, and should have been retained in alternative form rather than abandoned.
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Volume (Year): 17 (2005)
Issue (Month): 1 ()
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- Sunil Sharma & Sushil Bikhchandani, 2000. "Herd Behavior in Financial Markets: A Review," IMF Working Papers 00/48, International Monetary Fund.
- Joseph E. Stiglitz, 1996. "Whither Socialism?," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262691825, June.
- Davis, E. Philip, 1995. "Debt, Financial Fragility, and Systemic Risk," OUP Catalogue, Oxford University Press, number 9780198233312.
- Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
- Herbert A. Simon, 1996. "The Sciences of the Artificial, 3rd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262691914, June.
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