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Contribution Details

Type Working Paper
Scope Discipline-based scholarship
Title 'By a Silken Thread': regional banking integration and credit reallocation during Japan’s Lost Decade
Organization Unit
Authors
  • Mathias Hoffmann
  • Toshihiro Okubo
Language
  • English
Institution University of Zurich
Series Name Working paper series / Department of Economics
Number 102
ISSN 1664-7041
Number of Pages 40
Date 2021
Abstract Text 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.
Other Identification Number merlin-id:7765
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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
Additional Information Revised version ; Former title: ‘By a Silken Thread’: regional banking integration and pathways to financial development in Japan’s Great Recession