Katsutoshi Shimizu

Did amakudari undermine the effectiveness of regulator monitoring in Japan

The principal–agent problem between the regulator, regulated banks, and taxpayers is critical to the viability of the financial system’s safety net. There exists the danger that the regulator will collude with regulated banks to pursue their benefits at the expense of taxpayers, thereby reducing effectiveness of financial supervision. This paper proposes that the human relationship prevailing between the regulatory authorities and private banks referred to as “amakudari” is a form of collusion between the regulator and banks that endangers the safety net mechanism in Japan. Statistical analysis of data on regional banks shows that those banks accepting post-retirement officials from the Ministry of Finance have reduced capital adequacy levels and increased non-performing loans. Thus, the statistical result supports the hypothesis proposed in this paper.

The Choice of Raising Capital Under Strengthened Capital Regulation

This study investigates the determinants and outcomes of raising capital ratios upon the introduction of Basel II and III regulations. The evidence indicates that a bank is more likely to raise its capital base as its capital ratio is lowered. Although equity issuing is rarely used to raise the capital base/ratio, a lower ratio increases the likelihood of raising capital. Additionally, the results suggest that raising the capital base, except for equity issuing, alleviated asset contraction. Furthermore, the results provide supportive evidence for the penalty-aversion hypothesis that bank managers are averse to capital shortfall. Upon the introduction of Basel II and III, Japanese bank managers have incentive to avoid the costs of restrictions on policies and actions when banks fail the regulatory requirements now and in the future.