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Bank Risk Taking and Financial Stability: Evidence from Japan's Loan Market

February 13, 2020
Takuji Kawamoto*1
Taichi Matsuda*2
Koji Takahashi*3
Yoichiro Tamanyu*4

Abstract

We examine banks' risk taking in lending to small and medium-sized enterprises under the prolonged low interest rate environment in Japan. Specifically, we identify "low-return borrowers," whose borrowing interest rates are low relative to their financial soundness. Using bank-firm level data for millions of Japanese small and medium-sized enterprises, we find that bank loans to low-return borrowers have increased more than those to other normal firms in recent years and such risk taking by banks has been driven by the low interest rate environment as well as the increase in competition among banks. In addition, we show that highly capitalized banks with low profitability increased loans to such vulnerable borrowers more than lowly capitalized banks. These results suggest riskiness of credit allocation has increased in Japan's loan market, but it does not seem to pose an immediate threat to financial stability.

JEL classification
G21, E52, E44

Keywords
risk-taking channel; bank competition; credit allocation; low interest rate

The authors are grateful to Silvio Contessi, Yoshihiko Hogen, Yoshitaka Ichise, Daisuke Ikeda, Hirohide Koguchi, Mitsuhiro Osada, and participants at the 12th Annual Workshop of the Asian Research Network for their helpful suggestions. Any remaining errors are ours. The views expressed are those of the authors and do not necessarily reflect those of the Bank.

  1. *1Financial System and Bank Examination Department, Bank of Japan. (currently at the Research and Statistics Department)
    E-mail : takuji.kawamoto@boj.or.jp
  2. *2Financial System and Bank Examination Department, Bank of Japan. (currently at the Monetary Affairs Department)
    E-mail : taichi.matsuda@boj.or.jp
  3. *3Financial System and Bank Examination Department, Bank of Japan. (currently at the Research and Statistics Department)
    E-mail : kouji.takahashi-2@boj.or.jp
  4. *4Financial System and Bank Examination Department, Bank of Japan.
    E-mail : youichirou.tamanyuu@boj.or.jp

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