On April 1, 2002, the Japanese government lifted a blanket guarantee of all deposits and began limiting the coverage of time deposits. This paper uses this deposit insurance reform as a natural experiment to investigate the relationship between deposit insurance coverage and market discipline. I find that the reform raised the sensitivity of interest rates on deposits, and that of deposit quantity to default risk. In addition, the interest rate differentials between partially insured large time deposits and fully insured ordinary deposits increased for risky banks. These results suggest that the deposit insurance reform enhanced market discipline in Japan. I also find, however, that too-big-to-fail (TBTF) policy became a more important determinant of interest rates and deposit allocation after the reform, thereby partially offsetting the positive effects of the deposit insurance reform on overall market discipline.

This paper uses newly compiled data on Thai family businesses and their direct participation in politics to examine whether the political participation of family business yields private economic payoff. The paper finds that the political participation of family members is positively associated with the profitability of family businesses. Furthermore, this “political benefit” is found to be particularly large when firms are connected to the cabinet members. These results support the crony capitalism view that powerful business groups in Thailand have an incentive to directly hold influential public offices in order to influence the economic policy in their favor.Cronyism, Political Connection, Family Business, Thailand

This paper investigates whether banking integration plays an important role in transmitting financial shocks across geographical boundaries by using a dataset on the branch network of nationwide city banks and prefecture-level dataset on the formation and collapse of the real estate bubble in Japan. The results show that the credit and economic cycle of financially integrated prefectures exhibits higher sensitivity to fluctuation in land prices in cities relative to financially isolated ones. These results suggest nationwide banks can be a source of economic volatility when they pass on the impacts of financial shocks to host economies. (JEL E44, G21, R30)

No abstract

The recent financial turmoil highlights the incentive of highly leveraged financial institutions to take excessive risk, given the protection of limited liability. During the nineteenth and early twentieth century, many banks operated under liability rules which obligated shareholders to bear larger costs of bank insolvency in the form of contingent, or even unlimited, liability. This article examines the empirical relationship between the size of banks' contingent liability and their risk-taking behaviour using data on British banks from 1878 to 1912. We find that banks with more contingent liability appear to have taken less risk. We also find evidence that the risk-reducing effects of contingent liability were larger for banks with higher leverage, suggesting that contingent capital mitigated the moral hazard problem at banks.