Revisiting the Level Playing Field: International Lending Responses to Divergences in Japanese Bank Capital Regulations from the Basel Accord

Chakraborty, Suparna and Allen, Linda (2007): Revisiting the Level Playing Field: International Lending Responses to Divergences in Japanese Bank Capital Regulations from the Basel Accord.

Abstract

The 1998 passage of the Land Revaluation Law in Japan provided regulatory forbearance to Japanese banks in the form of a regulatory capital infusion. We test whether this divergence from international bank capital requirements had an impact on Japanese bank lending behavior. Because this natural experiment created an exogenous supply shock, we can utilize it to disentangle demand and supply effects in order to determine the impact on Japanese bank lending in both the U.S. and Japan. We find that the infusion of regulatory capital had no aggregate impact on Japanese bank lending in Japan, but it did change the allocation of loans. Well-capitalized Japanese banks shifted their lending from low margin, less capital intensive mortgage lending toward higher yielding, more capital intensive commercial loans. Moreover, we find evidence consistent with a shifting of Japanese bank lending activity away from U.S. lending(which is predominately real estate based) to domestic lending to fund manufacturing. Thus, we find that divergences from international capital standards have significant allocative effects on lending, as well as on bank profitability.

• Item Type: MPRA Paper
• Institution: Dept. of Economics and Finance, Baruch College, CUNY
• Language: English
• Keywords: Basel; international lending; capital adequacy; allocative effects; aggregate effects
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems