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An Econometric Evaluation of Bank Recapitalization Programs with Bank- and Loan-level Data

Nakashima, Kiyotaka (2015): An Econometric Evaluation of Bank Recapitalization Programs with Bank- and Loan-level Data. Published in: Journal of Banking and Finance , Vol. 63, No. C (2016): pp. 1-24.

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Public capital injections into the banking system are a comprehensive policy program aimed at reducing the financial risks faced by capital-injected banks, thereby stimulating their lending and profitability. This paper evaluates empirically two large-scale bank capital injections in Japan in 1998 and 1999. We begin by extracting the treatment effects of the public injections using bank-level panel data. Using a difference-in-difference estimator in two-way fixed-effects regression models, we find that the public injections significantly reduced the financial risks faced by the capital-injected banks, but did not stimulate their lending and profitability. Next, we investigate the factors that impeded bank lending following the capital injections using a matched sample of Japanese banks and their borrowers. By employing three-way fixed-effects regression models corresponding to the matched sample, we provide evidence that the deterioration of borrower creditworthiness inhibited not only the capital-injected banks, but also other banks, from lending more.

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