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Priority Rule Violations and Perverse Banking Behaviors

Theoretical Analysis and Implications of the 1990s Japanese Loan Markets

  • Hiroyuki Seshimo
  • Fukuju Yamazaki

Part of the SpringerBriefs in Economics book series (BRIEFSECONOMICS)

Also part of the Development Bank of Japan Research Series book sub series (BRIEFSDBJRS)

Table of contents

  1. Front Matter
    Pages i-xi
  2. Hiroyuki Seshimo, Fukuju Yamazaki
    Pages 1-6
  3. Hiroyuki Seshimo, Fukuju Yamazaki
    Pages 7-14
  4. Hiroyuki Seshimo, Fukuju Yamazaki
    Pages 27-42
  5. Hiroyuki Seshimo, Fukuju Yamazaki
    Pages 43-60
  6. Hiroyuki Seshimo, Fukuju Yamazaki
    Pages 79-80

About this book

Introduction

This book theoretically and empirically explores why Japanese banks engaged in seemingly contradictory behaviors in the 1990s, namely, the credit crunch and evergreening, i.e., inefficient additional lending. A credit crunch occurs when banks are unwilling to finance good and efficient projects.  Evergreening implies that banks reluctantly lend additional money to poorly performing and financially vulnerable firms. The authors hypothesize that these practices stemmed from violation of the absolute priority rule (APR) by creditors, thus making it possible to explain this seemingly contradictory banking behavior in a consistent way.

In Japan, the APR has often been violated legally by courts and some governmental acts. Examples from the 1990s involve legal abuse in the form of short-term tenancy protection (tanki chinshaku ken) and political intervention in the liquidation of Housing Loan Companies, or  Ju-sen. The Supreme Court of Japan has issued critical decisions leading to serious violations of APR in the early 1990s. Evidence provided here supports theoretical results.  Empirical testing for a significant difference in banking behavior before and after the Court decision using data from Japanese firms in the 1980s and 1990s found that theoretical arguments were empirically supportable in the last half of the 1980s and through the 1990s.  Finally, based on their analysis, from the theoretical point of view the authors consider the optimal legal scheme to achieve the best assessment of initial and additional lending in light of the legal reform of the 2000s. 

Keywords

Banking theory Credit crunch Banking theory Credit crunch Priority rule

Authors and affiliations

  • Hiroyuki Seshimo
    • 1
  • Fukuju Yamazaki
    • 2
  1. 1.School of CommerceSenshu UniversityTokyoJapan
  2. 2.College of EconomicsNihon UniversityTokyoJapan

Bibliographic information

  • DOI https://doi.org/10.1007/978-981-10-5852-3
  • Copyright Information Development Bank of Japan 2017
  • Publisher Name Springer, Singapore
  • eBook Packages Economics and Finance
  • Print ISBN 978-981-10-5851-6
  • Online ISBN 978-981-10-5852-3
  • Series Print ISSN 2191-5504
  • Series Online ISSN 2191-5512
  • Buy this book on publisher's site