On the Real Effects of Bank Bailouts: Micro-Evidence from Japan.” Discussion Paper No. 7441, Centre for Economic Policy Research

Abstract. Exploiting the Japanese banking crisis as a laboratory, we provide novel firm-level evidence on the real effects of different government interventions for resolving a systemic banking crisis. Our results show that government recapitalizations of weak banks result in significantly positive abnormal returns for those banks ' clients. After recapitalizations, banks extend larger loans to their existing borrowers and some firms related to recapitalized banks increase investment, but do not create more jobs than comparable firms. Most importantly, recapitalizations allow banks to extend larger loans to low and high quality firms alike, and low quality firms experience higher abnormal returns than other firms upon the announcement of their lending banks ' recapitalizations. Interestingly, recapitalizations by private investors have effects similar to government recapitalizations. Finally, we show that bank mergers engineered to enhance bank stability may hurt the borrowers of the sounder banks involved in the mergers