TY - JOUR
T1 - Foreign direct investment and regulatory remedies for banking crises
T2 - Lessons from Japan
AU - Allen, Linda
AU - Chakraborty, Suparna
AU - Watanabe, Wako
N1 - Funding Information:
We are greatly indebted to the editor, Lemma Senbet, and three anonymous referees for their insightful comments. We also appreciate the comments of: Joe Peek, Takeo Hoshi, Hirofumi Uchida, Masami Imai, Thomas Philippon, Hamid Mehran, Stavros Peristiani, Richard Startz, William Greene, as well as the seminar participants at the NBER Japan Project Meeting Tokyo, the NYU-NY Fed 2009 Seminar, the June 2010 BIS Workshop organized by Basel Committee on Banking Supervision, the Centre for Economic Policy Research (CEPR) and the Journal of Financial Intermediation, the European Financial Management Association Annual Meetings 2010, the American Law and Economic Association Annual Conference 2010, the Midwest Macroeconomics Meetings 2010, the Macro Colloquium, Graduate Center CUNY, the North East Universities Development Consortium (NEUDC) 2010 at MIT, Rutgers University and Eastern Economic Association Annual Meetings 2011. Chakraborty gratefully acknowledges financial support from the PSC-CUNY Research Foundation (Grant No. 62801-00 40). Watanabe gratefully acknowledges the financial support from the Japan Society for the Promotion of Science, Grants-in-aid for Young Scientists (B 18730207) and the Keio/Kyoto Global Center of Excellence Program. We also thank Akio Ino and Taisuke Ogawa for their excellent research assistance.
PY - 2011/9
Y1 - 2011/9
N2 - 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.
AB - 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.
KW - accounting changes
KW - bank lending
KW - banking crisis
KW - capital interventions
KW - internalization theory
KW - public capital injections
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U2 - 10.1057/jibs.2011.17
DO - 10.1057/jibs.2011.17
M3 - Article
AN - SCOPUS:80052650912
SN - 0047-2506
VL - 42
SP - 875
EP - 893
JO - Journal of International Business Studies
JF - Journal of International Business Studies
IS - 7
ER -
