The Banking Crisis and Productivity of Borrowing Firms - Evidence from Japan

This paper empirically analyzes how the decline in Japanese banks' capital adequacy ratios during the 1990s affected the productivity of borrowing firms, using the financial data of Japanese firms. The findings indicate a high probability that the decline in the capital adequacy ratios at main banks caused a decline in the productivity of borrowing firms during the financial crisis period from FY1997 through FY2000 (especially during FY1997 and FY1998). The outbreak of the financial crisis (November 1997) overlapped with the introduction of prompt corrective action (April 1998). The empirical findings show that the decline in bank capital adequacy ratios brought about a large worsening of productivity at those firms whose main banks had a low capital adequacy ratio to begin with, suggesting the possibility that efforts by banks to achieve capital adequacy standards in a short period of time may have caused a decline in productivity in the real economy.