Does a large loss of bank capital cause Evergreening? Evidence from Japan

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Abstract

Using the real estate lending share of the bank's loan portfolio at the peak of the land-price bubble as an instrument for bank capital, we identify the impact of capital adequacy on the allocation of bank lending under the Basel regulatory framework. We find that, in Japan, a large loss of bank capital caused by the regulator's excessively tough stance towards banks not only induced the contraction of the bank lending supply but also the banks' reallocation of their lending portfolios to financially unhealthy industries with a higher concentration of non-performing loans.

Original languageEnglish
Pages (from-to)116-136
Number of pages21
JournalJournal of The Japanese and International Economies
Volume24
Issue number1
DOIs
Publication statusPublished - 2010 Mar 1

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Keywords

  • Bank capital
  • Evergreening
  • Instrumental variable
  • Real estate lending

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics
  • Political Science and International Relations

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