Requiem for Market Discipline and the Specter of TBTF in Japanese Banking

Adrian Pop () and Diana Pop ()
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Adrian Pop: LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - IEMN-IAE Nantes - Institut d'Économie et de Management de Nantes - Institut d'Administration des Entreprises - Nantes - UN - Université de Nantes
Diana Pop: GRANEM - Groupe de Recherche Angevin en Economie et Management - UA - Université d'Angers - AGROCAMPUS OUEST - Institut National de l'Horticulture et du Paysage

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Abstract: This study examines the reaction of private market participants to the enhancement of the "Too-Big-To-Fail" (TBTF) doctrine in the Japanese banking sector. The event justifying the use of the "TBTF" label occurred on May 17th , 2003, when the Japanese government decided to bailout Resona Holdings, the 5th largest financial group in the country. By using a sample of all Japanese listed banks and the standard event study methodology, we document significant and positive wealth effects in the stock market accruing to large banks and negative (though non-significant) effects accruing to smaller banks. Besides the effect on bank equity values, we also document a significant abnormal volume of trading on days following the bailout announcement date for the largest banks only. We extend our empirical analysis on stock prices and trading volumes by detecting an original "pure" risk effect in the Credit Default Swap (CDS) market.

Date: 2009-09-23
Note: View the original document on HAL open archive server: https://hal.science/hal-00419235v1
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