Should Japanese Banks Be Recapitalized?

Douglas W. Diamond

Monetary and Economic Studies, 2001, vol. 19, issue 2, pages 1-19

Abstract: When a bank is a relationship lender, its financial health affects the access to credit of its borrowers. If bank regulators or uninsured private depositors might force a bank to close, it will take any action necessary to remain open. This can lead to inefficient and excessive foreclosure of the bank's relationship-based loans to viable borrowers, or alternatively to the inability to collect existing loans due to its fear of recognizing an accounting loss if a loan is called. The level of bank capital then has real effects on its borrower's access to credit. A subsidized recapitalization of banks with relationship-based loans can be a good policy. The size of the recapitalization is critical , because providing too small an amount of subsidized capital can be worse than providing no capital. Providing subsidized capital to banks without relationship-based loans is never a good policy.

JEL-codes: G21 (search for similar items in EconPapers)
Date: 2001
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