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Bank Risk and the Declining Franchise Value of the Banking Systems in the United States and Japan

Author

Listed:
  • Howard Lee
  • Liliana Rojas-Suárez
  • Steven Riess Weisbrod

Abstract

This paper associates both the increase in risk taken by wholesale banks in the United States and the decline in earnings at wholesale banks in Japan with a reduction in the franchise value of wholesale banking. In contrast with the conventional view that relates the franchise value of banking to informational advantages over other lenders, this paper argues that banks’ franchise value originates in their provision of liquidity and payments services to their customers. Therefore, the decline in corporate demand for bank liquidity is identified as a major factor explaining the fall of the franchise value. The paper also analyzes recent proposals for banking reform and assesses their relevance for dealing with the problems of wholesale banks.

Suggested Citation

  • Howard Lee & Liliana Rojas-Suárez & Steven Riess Weisbrod, 1992. "Bank Risk and the Declining Franchise Value of the Banking Systems in the United States and Japan," IMF Working Papers 92/45, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:92/45
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    References listed on IDEAS

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    1. Winton, Andrew, 1995. "Costly State Verification and Multiple Investors: The Role of Seniority," Review of Financial Studies, Society for Financial Studies, vol. 8(1), pages 91-123.
    2. Patrick Bolton & Antoine Faure-Grimaud, 2010. "Satisficing Contracts," Review of Economic Studies, Oxford University Press, vol. 77(3), pages 937-971.
    3. Welch, Ivo, 1997. "Why Is Bank Debt Senior? A Theory of Asymmetry and Claim Priority Based on Influence Costs," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 1203-1236.
    4. Dong He, 2004. "The Role of Kamco in Resolving Nonperforming Loans in the Republic of Korea," IMF Working Papers 04/172, International Monetary Fund.
    5. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, January.
    6. Armen Hovakimian & Edward Kane & Luc Laeven, 2003. "How Country and Safety-Net Characteristics Affect Bank Risk-Shifting," Journal of Financial Services Research, Springer;Western Finance Association, vol. 23(3), pages 177-204, June.
    7. Arturo Bris & Ivo Welch, 2005. "The Optimal Concentration of Creditors," Journal of Finance, American Finance Association, vol. 60(5), pages 2193-2212, October.
    8. IV, Thomas J. Fitzpatrick & Thomson, James B., 2011. "How well does bankruptcy work when large financial frms fail? Some lessons from Lehman Brothers," Economic Commentary, Federal Reserve Bank of Cleveland, issue Oct.
    9. Bolton, Patrick & Scharfstein, David S, 1996. "Optimal Debt Structure and the Number of Creditors," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 1-25, February.
    10. Joseph R. Mason, 2005. "A Real Options Approach to Bankruptcy Costs: Evidence from Failed Commercial Banks During the 1990s," The Journal of Business, University of Chicago Press, vol. 78(4), pages 1523-1554, July.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Konishi, Masaru & Yasuda, Yukihiro, 2004. "Factors affecting bank risk taking: Evidence from Japan," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 215-232, January.
    2. Rubi Ahmad & M. Ariff & Michael Skully, 2008. "The Determinants of Bank Capital Ratios in a Developing Economy," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, pages 255-272.
    3. Caprio, Gerard Jr. & Summers, Lawrence H., 1993. "Finance and its reform : beyond laissez-faire," Policy Research Working Paper Series 1171, The World Bank.
    4. Horiuchi, Akiyoshi & Shimizu, Katsutoshi, 1998. "The deterioration of bank balance sheets in Japan: Risk-taking and recapitalization," Pacific-Basin Finance Journal, Elsevier, vol. 6(1-2), pages 1-26, May.
    5. Caprio Jr., Gerard, 1998. "Banking on crises : expensive lessons from recent financial crises," Policy Research Working Paper Series 1979, The World Bank.

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