CIRJE-F-351 | "The Impacts of"Shock Therapy"under a Banking Crisis: Experiences from Three Large Bank Failures in Japan" |
Author Name | Fukuda, Shin-ichi and Satoshi Koibuchi |
Date | July 2005 |
Full Paper | PDF file@ |
Remarks | Subsequently published in Japanese Economic Review Vol. 57, No. 2 (Jan. 2006), pp.232-246. |
Abstract |
A bank failure can have various adverse consequences for the clients. The adverse impacts
might, however, differ depending on who takes over the operation of the failed banks. In this
paper, we show that how to manage the new banks is important in mitigating the short-run and
long-run consequences of bank failures. In the analysis, we focus on clients of three large
failed Japanese banks - Hokkaido Takushoku Bank, the Long-term Credit Bank of Japan
(LTCB), and the Nippon Credit Bank. We examine when the number of bankruptcies
increased and how the market valuation changed for the client firms after the banks' operations
were taken over by new banks. As for the clients of LTCB, there were dramatic increases of
bankruptcies in the short-run but the surviving clients showed significant recovery of their stock
prices. In contrast, as for the clients of the other two banks, there was neither dramatic
increase of bankruptcies nor significant recovery of their stock prices. The result implies that
"shock therapy" or "soft budget constraints" had dramatically different consequences in solving
bad loan problems in Japan. |