Impaired bank health and default risk

Abstract

Empirical studies in corporate finance have long been focused on the role of banks in reducing the costs of financial distress. The environment and events in Japan provide a "natural experiment" that allows such empirical studies. The number of bankruptcies steadily increased throughout the 1990s, and peaked in 2000. During this period, Japan's banking sector, in contrast, faced considerable problems regarding the disposal of their bad loans. The purpose of this paper is to investigate how various measures of bank health and how defaults of major trading partners affected the probability of bankruptcy among medium-size firms in Japan. Using probit models, we examine the causes of bankruptcy for unlisted Japanese companies in the late 1990s and early 2000s. We find that several measures of bank-specific financial health have had significant impacts on a borrower's probability of bankruptcy, even when observable characteristics relating to these borrower's financial variables are controlled. In particular, a close bank-firm relationship-which usually reduces the probability of bankruptcy-exacerbates the impacts of a financial crisis, which substantially damages other bank health measures as well.

Japan’s banking crisis: An event-study perspective

“…Our findings are broadly consistent with these studies, but differ in that, while we find that certain types of bank client firms are sensitive to crisis-related events, within this category, the strength of bank-firm relationships does not seem to matter much. Finally, recent studies of the Japanese banking crisis (e.g., Hoshi and Kashyap, 2004;Peek and Rosengren, 2005;Fukuda et al, 2005) emphasize the tendency of ailing banks to support ailing clients (''zombies''); the evidence we provide from stock prices (which may not be the most appropriate tool for testing these theories) indicates that this phenomenon was not very pronounced during our sample period.…”

Effect of internal controls on credit risk among listed Spanish banks

“…There is evidence that banks which have paid particular attention to risk management have benefited from credit availability which led to the creation of better bank assets and profitability (Cebenoyan & Strahan, 2004). Banks in Japan have had souring figures in the amount of nonperforming loans and provision for loan losses which are normally used as proxies for credit risk (Fukuda, Kasuya & Akashi, 2009). The writers reported of the warning from the Japanese government on the need for banks to reduce non-performing loans since it has seriously affected the financial health of the banking industry.…”

When did firms become more different? Time-varying firm-specific volatility in Japan

“…21 See the introduction for references to relevant papers. Also see Fukuda et al (2005), Uesugi (2008) and Fukuda et al (2009), who find that there was less evergreening for small firms. 22 In the balanced panel, there are 52 firms in construction; 49 in trade; 382 in manufacturing; 21 in services; and 73 in the ''other'' sector.…”