Requiem for Market Discipline and the Specter of TBTF in Japanese Banking

Adrian Pop (1) , Diana Pop (2)

1 LEMNA - Laboratoire d'économie et de management de Nantes Atlantique
2 GRANEM - Groupe de Recherche Angevin en Economie et Management

This study examines the reaction of private market participants to the enhancement of the “Too-Big-To-Fail” (TBTF) doctrine in the Japanese banking sector. The event justifying the use of the “TBTF” label occurred on May 17th , 2003, when the Japanese government decided to bailout Resona Holdings, the 5th largest financial group in the country. By using a sample of all Japanese listed banks and the standard event study methodology, we document significant and positive wealth effects in the stock market accruing to large banks and negative (though non-significant) effects accruing to smaller banks. Besides the effect on bank equity values, we also document a significant abnormal volume of trading on days following the bailout announcement date for the largest banks only. We extend our empirical analysis on stock prices and trading volumes by detecting an original “pure” risk effect in the Credit Default Swap (CDS) market.

Domaines: Economies et finances; Gestion et management

Adrian Pop, Diana Pop. Requiem for Market Discipline and the Specter of TBTF in Japanese Banking. 2009. ⟨hal-00419235⟩