Montgomery, Heather and Takahashi, Yuki (2011): Bank recapitalization in the U.S. - lessons from Japan. Published in: The Journal of Social Science No. 71 : pp. 5-24.
Download (406kB) | Preview
This study empirically investigates the effectiveness of the Capital Purchase Program (CPP), the centerpiece of the United States 700 billion dollar policy response to the global financial crisis of 2008. We frame our analysis of the United States policy response against the backdrop of Japan’s banking crisis and policy response in the late 1990s. As one of the only advanced economies with a large global presence in international finance, Japan’s banking crisis of 1997 and the effectiveness of the policy response offered important lessons to U.S. policymakers in 2008. Based on empirical studies of Japan’s bank recapitalization program, we distill the most crucial lessons to be the importance of speed, adequate scale and customized restructuring in forming recapitalization packages.
The United States and other economies affected by the 2008 global crisis took this first lesson to heart and reacted with unprecedented speed to events in the Autumn of 2008. But despite the large headline figure of 700 billion dollars, the program was not of adequate scale and was actually smaller than Japan’s recapitalization program of 1997-1998 in relative terms. More critically, program implementation in the first year was standardized and there was no investigation into the recipient banks’ business plans or financial condition to allow restructuring to be tailored to each individual recipient bank. These latter two points significantly hampered the effectiveness of the bank recapitalization program.
Our findings demonstrate that the program was successful in achieving at least one policy objective of the program: boosting recipient banks regulatory capital ratios. But we find that the program failed to achieve another important policy objective, to stimulate bank lending. To the contrary, we find evidence that recipient banks reduced lending, presumably because of the pressure to cut highly risk-weighted assets in order to increase their capital adequacy ratios. Although encouraging banks to increase bad loan write-offs was not an explicit policy objective of the CPP according to our reading of statements from the Department of Treasury, we also look at the impact of the program on bad loan write-offs and find no evidence that recapitalization stimulated bad loan write-offs either.
The main empirical results here echo the findings of analysis of Japan’s bank recapitalization program in 1997. In Japan’s case, the second round capital injections in 1998 were of significantly larger scale and more tailored to meet the needs of recipient banks, which increased the effectiveness of the policy intervention. Future research will investigate whether the United States followed a similar pattern and the CPP recapitalizations of 2009 were more effective than those made in the first year of the program.
|Item Type:||MPRA Paper|
|Original Title:||Bank recapitalization in the U.S. - lessons from Japan|
|Keywords:||Capital injection; Systemic crisis|
|Subjects:||G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation
G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages
|Depositing User:||Heather A. Montgomery|
|Date Deposited:||05. Sep 2011 11:29|
|Last Modified:||12. Feb 2013 16:14|
Corbett, J., Onji, K., & Vera, D. (2010). Capital injection, restructuring targets and personnel management: The case of Japanese regional banks. Unpublished Mimeograph.
Hoshi, T., & Kashyap, A. (2008, October 23). 米公的資金 規模は不十分 [The Amount of the US Capital Injection Was Not Sufficient]. Nihon Keizai Shimbun, p. 27.
Hoshi, T., & Kashyap, A. K. (2010). Will the U.S. bank recapitalization succeed? Eight lessons from Japan. Journal of Financial Economics, 97(3), 398-417.
Ito, T., & Harada, K. (2004). Credit Derivatives as a New Japan Premium. The Journal of Money, Credit and Banking, 36(5), 965-968.
Kaminsky, G. L., & Reinhart, C. M. (1999). The Twin Crises: The Causes of Banking and Balance-of-Payments Problems. American Economic Review, 89(3), 473-500.
Laeven L., & Valencia, F. (2010). Resolution of Banking Crises: The Good, the Bad, and the Ugly. IMF Working Paper No. 10/146.
Montgomery, H. (2002). Taipei, China’s Banking Problems: Lessons from the Japanese Experience. ADB Institute Research Paper 42. Tokyo: ADBI.
Montgomery, H. (2004). Macroeconomic Effects of Capital Adequacy Regulation in Japan. In M. Hanazaki & J. Teranishi (Eds.). Designing Financial Systems in East Asia and Japan (pp. 152-185). London: RoutledgeCurzon Press.
Montgomery, H., & Shimizutani, S. (2009). The effectiveness of bank recapitalization policies in Japan. Japan and the World Economy, 21(1), 1-25.
Nihon Keizai Shimbun. (1998, February 19). 金融安定化法成立どう動く銀行界（下）世論・政治で右往左往－公的資金にためらい [Reaction of Banking Industry to the Financial Function Stabilization Plan of 1998]. Nihon Keizai Shimbun, p. 7.
Shimizutani, S., & Montgomery, H. (2008, November 27). 米欧銀への資本注入－日本の教訓から [Bank Recapitalization in the West – Lessons from Japan]. Nihon Keizai Shimbun, p. 31.
Takenaka, H. (2008, October 16). 信認の危機 克服へ正念場 [Confidence Crisis of the Government]. Nihon Keizai Shimbun, p. 27.
U.S. Department of the Treasury. (2008a, October 14). Treasury Announces TARP Capital Purchase Program Description. Retrieved November 2, 2010, from http://www.ustreas.gov/press/releases/hp1207.htm
U.S. Department of the Treasury. (2008b, October 20). Statement by Secretary Henry M. Paulson, Jr. on Capital Purchase Program. Retrieved November 2, 2010, from http://www.ustreas.gov/press/releases/hp1223.htm