The role of regulatory capital and bank credit in the economy of Japan

This dissertation uses both micro-level and macro-level empirical analysis to examine the role of financial institutions and the supply of credit in Japan's economy in the 1990s.;Chapter II investigates the effect of the 1988 Basel Accord on Japanese bank portfolios. Analysis using a panel of Japanese bank balance sheets reveals that the new regulation led to a reduction in bank lending in response to stricter regulations on bank capital. Both domestic and international banks gradually reduced loan growth in order to increase capital ratios prior to implementation of the new capital standards. After the regulation became effective, loan growth became sensitive to capital to asset ratios for both international and domestic banks.;Chapter III also focuses on individual banks, examining how institutional characteristics of Japan's banking system may have contributed to the current banking crisis. A model of bank lending behavior that incorporates these characteristics of Japan's banking sector is developed and used as the basis of an empirical investigation into lending practices in Japan.;Empirical analysis demonstrates that the allocation of bank loans in Japan is sensitive to measures of financial health traditionally used by U.S. banks in evaluating potential loan recipients. Closer examination of bank lending patterns in the pre-Basel period provides evidence of a strong link between the allocation of bank loan portfolios in the 1980s and the current level of non-performing loans. In particular, the shift away from a reliance on large corporate clients and a shift into lending to small and medium enterprises seems to have contributed to the non-performing loan problem.;Chapter IV links the findings in chapters II and III to the macroeconomy, investigating the effect of bank credit on real economic activity in Japan in the 1990s. Vector auto-regression (VAR) analysis contradicts the hypothesis that a credit crunch contributed to the heisei recession. However, analysis of Japan's current recession, which began in 1997, shows that there have been a series of negative shocks to bank credit in recent years. Conditional forecasts reveal that these shocks have been transmitted to the real economy, significantly affecting real economic activity.