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'By a Silken Thread': regional banking integration and credit reallocation during Japan’s Lost Decade


Hoffmann, Mathias; Okubo, Toshihiro (2021). 'By a Silken Thread': regional banking integration and credit reallocation during Japan’s Lost Decade. Working paper series / Department of Economics 102, University of Zurich.

Abstract

A key benefit from banking integration is that it allows credit to be reallocated to regions with high credit demand. Using the natural experiment of Japan’s lost decade, we show that this reallocation channel mitigated the real effects from the bank liquidity shock in prefectures with many bank-dependent SMEs. To account for the potential endogeneity of banking integration, we exploit the fact that regional segmentation of banking markets in Japan goes back to the institutions set up for silk export finance in the late 19th century. Using silk as an instrument for modern-day regional banking integration, we illustrate how the bias of the OLS estimate can provide information about unobserved cross-regional heterogeneity in bank-firm matches when only aggregate regional data is available. Our results highlight that well-integrated banking markets are important and complementary to bond markets in limiting macroeconomic asymmetries in a monetary union, in particular during major financial crises.

Abstract

A key benefit from banking integration is that it allows credit to be reallocated to regions with high credit demand. Using the natural experiment of Japan’s lost decade, we show that this reallocation channel mitigated the real effects from the bank liquidity shock in prefectures with many bank-dependent SMEs. To account for the potential endogeneity of banking integration, we exploit the fact that regional segmentation of banking markets in Japan goes back to the institutions set up for silk export finance in the late 19th century. Using silk as an instrument for modern-day regional banking integration, we illustrate how the bias of the OLS estimate can provide information about unobserved cross-regional heterogeneity in bank-firm matches when only aggregate regional data is available. Our results highlight that well-integrated banking markets are important and complementary to bond markets in limiting macroeconomic asymmetries in a monetary union, in particular during major financial crises.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:F36, F40, G01, N15, N25
Uncontrolled Keywords:Japan, Lost Decade, banking integration, regional business cycles, transmission of financial shocks, bank lending channel, firm-borrowing channel, reallocation channel, internal capital markets, monetary union
Language:English
Date:May 2021
Deposited On:19 Dec 2012 15:47
Last Modified:12 Oct 2021 14:59
Series Name:Working paper series / Department of Economics
Number of Pages:40
ISSN:1664-7041
Additional Information:Revised version ; Former title: ‘By a Silken Thread’: regional banking integration and pathways to financial development in Japan’s Great Recession
OA Status:Green
Official URL:https://www.econ.uzh.ch/de/research/publications/workingpapers.html?paper-id=780

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