Bank capital shocks and portfolio risk: Evidence from Japan

• Iwatsubo, Kentaro

  Hitotsubashi University

Abstract

Despite the downward trend of land prices and the ex-post low re- turn on real estate loans, Japanese banks increased their lending to the real estate sector during the 1990s. We argue that this phenomenon can be explained by the risk-shifting incentives of banks and discover that banks with low capital-to-asset ratios and low franchise value chose high-risk assets such as real estate loans. Unlike previous stud- ies, we show that the capital-risk relationship is nonlinear and changes from positive to negative as franchise value falls. We also …nd that a capital adequacy requirement did not prevent risk-taking behavior of undercapitalized banks since they then just issued more subordinated debts to meet this requirement. In contrast, government capital injec- tions led banks to reduce risky loans at the margin. Recapitalization by issuing subordinated debts helped banks recover their capital losses and mitigated the credit crunch, but consequently allowed them to in- crease their exposure to the real estate sector and worsened the bad loan problems.

Journal

• Japan and the world economy

  Japan and the world economy 19 (2), 166-186, 2007-03

  Elsevier B.V.

Keywords

• Bank risk
• Risk-shifting incentives
• Franchise value
• Capital adequacy requirement

Details

• CRID: 1050006065624382208
• NII Article ID: 120006933782
• NII Book ID: AA10679644
• ISSN: 09221425
• HANDLE: 10086/13803
• Text Lang: en
• Article Type: journal article
• Data Source:
  • IRDB
  • CiNii Articles
  • KAKEN