On the Real Effects of Bank Bailouts: Micro Evidence from Japan

Abstract

SummaryExploiting the Japanese banking crisis as a laboratory, we provide firm-level evidence on the real effects of bank bailouts. Government recapitalizations result in positive abnormal returns for the clients of recapitalized banks. After recapitalizations, banks extend larger loans to their clients and some firms increase investment, but do not create more jobs than comparable firms. Most importantly, recapitalizations allow banks to extend larger loans to low and high quality firms alike, and low quality firms experience higher abnormal returns than other firms. Interestingly, recapitalizations by private investors have similar effects. Moreover, bank mergers engineered to enhance bank stability appear to hurt the borrowers of the sounder banks involved in the mergers. Keywords: Recapitalization, Merger, Banking Crisis JEL Classification: G21, G34We August 2009Abstract. Exploiting the Japanese banking crisis as a laboratory, we provide firm-level evidence on the real effects of bank bailouts. Government recapitalizations result in positive abnormal returns for the clients of recapitalized banks. After recapitalizations, banks extend larger loans to their clients and some firms increase investment, but do not create more jobs than comparable firms. Most importantly, recapitalizations allow banks to extend larger loans to low and high quality firms alike, and low quality firms experience higher abnormal returns than other firms. Interestingly, recapitalizations by private investors have similar effects. Moreover, bank mergers engineered to enhance bank stability appear to hurt the borrowers of the sounder banks involved in the mergers.

Efficient Recapitalization

“…Allen, Chakraborty, and Watanabe (2009) provide empirical evidence consistent with the main predictions of our model: they find that interventions work best when they target equity injections into banks that have material risks of insolvency. Giannetti and Simonov (2011) find that bank recapitalizations result in positive abnormal returns for the clients of recapitalized banks as predicted by our debt overhang model. Glasserman and Wang (2011) develop a contingent claims framework to estimate market values of securities issued during bank recapitalizations such as preferred stock and warrants.…”

The risk spiral: The effects of bank capital and diversification on risk taking

“…The above result is consistent with "zombie lending" behavior, which is documented empirically in Acharya, Eisert, Eufinger, and Hirsch (2016), Giannetti and Simonov (2013), and Peek and Rosengren (2005). These papers report that undercapitalized banks are found to prefer existing low-quality borrowers to existing or new high-quality borrowers, while well-capitalized banks do not.…”

“…This result is in line with banks exhibiting "zombie lending" behavior where undercapitalized banks are found to prefer existing low-quality borrowers to existing or new high-quality borrowers, as described in Acharya, Eisert, Eufinger, and Hirsch (2016), Schivardi, Sette, and Tabellini (2017), Giannetti and Simonov (2013), and Peek and Rosengren (2005). By 1 Brealey, Leland, and Pyle (1977), Campbel and Kracaw (1980), Diamond (1984), Fama (1985).…”

Forbearance Patterns in the Post-Crisis Period

“…This literature strongly emphasises the negative real effects this behaviour can have for the economy. The presence of zombie firms was found to depress job creation, deter the entry of healthy firms, and to decrease employment and investment levels in healthy firms (Giannetti and Simonov, 2013 In the following, we test this correlation of forbearance and new lending for Ireland. First, we set up buckets of borrowers, b, by bank, segment, time, and county because we suggest that lending decisions are made separately for these groups.…”