Comments on Koibuchi paper
Masaya Sakuragawa(Keio University)Ｊａｐａｎｅｓｅ Banking Issues☆ Forbearance☆
Pretend there is no problem

you do not startfalling until youlook down

How to deal with Japanesebanking problem?
Financial Reform, so-called, “Takenaka
Plan” starts (2002, October)
Establishment of Industrial Revitalization
Corporation (hereafter, “Saisei-kiko”, 2003,May)⇒ Non-performing loans decline to a halfJapanese Non-performing-loanproblem (sketch)
Financial Authority①Liquidity
supplyBOJ②TakenakaPlanBanking sector（small capital, evergreen ）Disposal ofNPL’sLiquidity
supplyCorporate sector（Debt-hang, Zombies）③ Saisei-KikoRole of Saisei-Kiko•

Why does the gov. intervene?
¾ Eliminating negotiation costs¾ Resolving debt-overhang problem quickly① 不良債権の売買市場が発展するための「呼び水」¾ 債権買取価格の適正化¾ 再生可能性に関する基準の浸透
9 「生産性向上基準」
9 「財務健全化基準」

Event study Approach• Evaluate the role of Sakisei-Kiko byfocusing on individual events on debtforgiveness• Compare the market response ofindividual events between private andpublic settlements

Event Study Issues
target bankcumulativeabnormal
returntarget bankcumulative
abnormalreturn

Event Study Issues• Window length can be interesting– Information leakage– Expectations formation and revision– Ex-post information possessing• Maybe nothing happened in longer
windows …
• CAR diagram forestalls any dispute• Robustness to window size

Arguments• Establishment of Saisei-Kiko and public
settlement promoted debt forgiveness.
• In private settlement main bank incurred
the costs more than the loan share.
• In public settlement main bank incurred
the cost in proportion to the loan share• Public settlement had a redistribution
effect to favor main bank.

Hypotheses
1. Announcement of debt forgiveness should
lead to a negative impact on the stock
price of the main bank in private settlement
2. Announcement of debt forgiveness should
lead to a positive impact on the stock priceof the main bank in public settlement

Findings• In public settlement, announcement ofdebt forgiveness lead to a positive andsignificant impact on the stock price ofthe main bank
• In private settlement, announcement leadto insignificant impact• ……may support the positive role ofSaisei-Kiko

Contributions• First paper to evaluate Saisei-kiko• Other papers to evaluate financial reform• Yamori and Kobayashi (2007, JER),
Evaluate nationalization of Resona bank
• Sakuragawa and Watanabe (2007, KeizaiKenkyu), Evaluate Takenaka Plan

What the theory?
• Debt forgiveness should be arranged tomaximize the total surplus accruing to thefirm and banks• Even in private settlement the stock priceof main bank may rise.
• Hypotheses consider the costs of debt
forgiveness, but not the benefits.

Why is the sign positive?
1. Distributional effect to favor main bank
2. Change in project quality by the Saiseikiko’s screening ・・・・sample selectionbias
3. Change in macroeconomics

Distributional Effect Important ?
• Announcement of debt forgiveness should
lead to a negative impact on the stock
price of other banks, not main bank, inpublic settlement• Try !

Technical Comments• Error terms may be correlated among
events that happened at the same days.
• Estimation of a system of separate
equations using GLS may lead to more
efficient coefficients. See Brewer et al.
• More variables for project performance incross-section analysis ?Question?
• Was corporate revitalization important foreconomic recovery?
• In total 3 trillions yen, small relative to thetotal NPLs, 110 trillions yen