Bank capital shocks and portfolio risk: Evidence from Japan

Copyright (C)2007, Elsevier B.V.

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.

Elsevier B.V.

2007-03

English(eng)

journal article

AM

09221425

AA10679644

Japan and the world economy

19

2

166

186

010a Journal Articles　=　雑誌掲載論文

https://hdl.handle.net/10086/13803