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Financial Deregulation and Crisis:An ‘Agency-conflict’ Case of Japan

  • Hossain, Monzur
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    The main focus of this paper is on the ‘agency-conflict’ during financial deregulations in the 1980s as the potential causality of Japanese banking crisis in the 1990s. Agency conflict is defined as the conflict of interest among the policy makers and agencies (e.g. banks) that arises as a combined effect of heteroschedasticity1 of policy shifts at that time and the overall weaknesses of corporate governance of the Japanese banks. This paper theoretically and empirically tests the hypothesis that “agency-conflict” increases short-term profit and can be a potential cause of the subsequent crisis. First part of the theoretical model based on the Bayesian Learning Model explains how agency conflict can increase profit in brief and second part of the theory explains how banks can be vulnerable to crisis at the outset of the bubble. Moreover, the theoretical model is used as the basis of empirical analyses on the causes to the probability of banking crisis. The paper also provides discussion on a number of interrelated structural changes and agency-conflicting issues that occurred in the Japanese financial system. However, the analyses find that the ‘agency-conflict’ is significant to the probability of banking crisis.

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    File URL: http://mpra.ub.uni-muenchen.de/24856/1/MPRA_paper_24856.pdf
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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24856.

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    Date of creation: Jun 2005
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    Handle: RePEc:pra:mprapa:24856
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    1. D. Woo & Akihiro Kanaya, 2000. "The Japanese Banking Crisis of the 1990's; Sources and Lessons," IMF Working Papers 00/7, International Monetary Fund.
    2. Monzur Hossain & Md. Shahiduzzaman, 2004. "Development of Non Bank Financial Institutions to Strengthen the Financial System of Bangladesh," Finance 0409006, EconWPA.
    3. Naoyuki Yoshino & Eisuke Sakakibara, 2002. "The Current State of the Japanese Economy and Remedies," Asian Economic Papers, MIT Press, vol. 1(2), pages 110-126.
    4. Hossain, Monzur, 2004. "Did The Asset Price Bubble Matter For Japanese Banking Crisis In The 1990s?," MPRA Paper 24738, University Library of Munich, Germany.
    5. Takeo Hoshi & Anil Kashyap, 1999. "The Japanese Banking Crisis: Where Did It Come From and How Will It End?," NBER Working Papers 7250, National Bureau of Economic Research, Inc.
    6. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    7. Robert Flood & Nancy Marion, 1998. "Perspectives on the Recent Currency Crisis Literature," NBER Working Papers 6380, National Bureau of Economic Research, Inc.
    8. Hoshi, Takeo, 2001. "What Happened to Japanese Banks?," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(1), pages 1-29, February.
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