Understanding the rise and decline of the Japanese main bank system: The changing effects of bank rent extraction

Xueping Wu and Jun Yao

Journal of Banking & Finance, 2012, vol. 36, issue 1, 36-50

Abstract: This paper shows how main bank rent extraction affects corporate decisions about investment and financing during financial regulatory reform. Our model predicts that limited loanable funds can initially contain main bank controlled overinvestment, even when new equity is available to the firm. Abundant funds facilitate overinvestment to the detriment of firm profitability. A shift of control rights back to the firm due to financial deregulation produces an “equity for upside potential and bank debt for downside risk” bias against the banks. A stock market and real estate boom in Japan made it harder than ever for the banks to diversify risk. The insights from this analysis help explain why Japan’s main bank system was beneficial in the (capital constrained) postwar period but became harmful during the (capital abundant and even bubbly) 1980s, and why the adverse shocks of the post-deregulation 1990s had such severe effects on the banking system.

Keywords: Financial deregulation; Main bank; Rent extraction; Investment efficiency; Bank risk (search for similar items in EconPapers)
JEL-codes: G21 G28 G30 G32 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:36:y:2012:i:1:p:36-50

DOI: 10.1016/j.jbankfin.2011.06.003

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