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Impaired Bank Health and Default Risk*1

September 2005
Shin-ichi Fukuda*2
Munehisa Kasuya*3
Kentaro Akashi*4

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  • *1 Earlier versions of this paper were presented at the Bank of Japan (Research and Statistics Department) and the Spring Meeting of JEA (Kyoto Sangyo University, Japan, on June 4-5 2005). We would like to thank Yuichi Abiko and other participants for their helpful comments. Views expressed in this paper are those of authors and do not necessarily reflect those of the Bank of Japan or its Research and Statistics Department.
  • *2 University of Tokyo
    E-mail: sfukuda@e.u-tokyo.ac.jp
  • *3 Research and Statistics Department
    E-mail: munehisa.kasuya@boj.or.jp
  • *4 University of Tokyo

Abstract

Empirical studies in corporate finance have long been interested in the role of banks in reducing the costs of financial distress. 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. The environment and events in Japan provide a "natural experiment" that allows the empirical test. We find that several measures on bank-specific financial health have significant impacts on a borrower's probability of bankruptcy, even when observable characteristics relating to these borrower's financial variables are controlled for. 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.

Key words:
Bankruptcy, Bank-firm relationship, Hold-up problem, Unlisted firms

JEL #:
G32, G33, E44.