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Financial regulation and banking sector performance: a comparison of bad loan problems in Japan and Korea

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  • Chan Guk Huh
  • Sun Bae Kim

Abstract

We estimate the bad loan rate in Japan and Korea for 1973-1992 using data on defaults on notes issued by the corporate sector. This method exploits institutional features common in both countries which suggest a close linkage between default on notes and default on bank borrowing. Our main findings are as follows. First, the pattern of the estimated bad loan rate series generally conforms to past business cycle patterns in both countries. Second, the bad loan rate is substantially higher in Korea than Japan. Lastly, a much tighter linkage is observed for Japan between the bad loan rate and a set of plausible economic explanatory variables. We offer some interpretation for these findings.

Suggested Citation

  • Chan Guk Huh & Sun Bae Kim, 1994. "Financial regulation and banking sector performance: a comparison of bad loan problems in Japan and Korea," Economic Review, Federal Reserve Bank of San Francisco, pages 18-29.
    • Handle: RePEc:fip:fedfer:y:1994:p:18-29:n:2
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    References listed on IDEAS

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    1. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1991. "Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(1), pages 33-60.
    2. Sadahiko Suzuki & Richard W Wright, 1985. "Financial Structure and Bankruptcy Risk in Japanese Companies," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 16(1), pages 97-110, March.
    3. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 393-414.
    4. Lichtenberg, Frank R. & Pushner, George M., 1994. "Ownership structure and corporate performance in Japan," Japan and the World Economy, Elsevier, vol. 6(3), pages 239-261, October.
    5. Sheard, Paul, 1989. "The main bank system and corporate monitoring and control in Japan," Journal of Economic Behavior & Organization, Elsevier, vol. 11(3), pages 399-422, May.
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    Cited by:

    1. Harvie, Charles & Pahlavani, Mosayeb, 2006. "Testing for Structural Breaks in the Korean Economy 1980-2005: An Application of the Innovational Outlier and Additive Outlier Models," Economics Working Papers wp06-09, School of Economics, University of Wollongong, NSW, Australia.
    2. Heather Smith, 1999. "The Failure of Korea Inc," Agenda - A Journal of Policy Analysis and Reform, Australian National University, College of Business and Economics, School of Economics, vol. 6(2), pages 153-166.
    3. Pierre-Guillaume Meon & Laurent Weill, 2005. "Can mergers in Europe help banks hedge against macroeconomic risk?," Applied Financial Economics, Taylor & Francis Journals, vol. 15(5), pages 315-326.
    4. Thomas F Cargill & Elliott Parker, 2001. "FINANCIAL LIBERALIZATION IN CHINA - Limitations and lessons of the Japanese regime," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 6(1), pages 1-21.
    5. Harvie, Charles & Lee, Hyun-Hoon, 2003. "Export-Led Industrialisation and Growth - Korea's Economic Miracle 1962-89," Economics Working Papers wp03-01, School of Economics, University of Wollongong, NSW, Australia.
    6. Harvie, Charles & Pahlavani, Mosayeb, 2006. "Sources of Economic Growth in South Korea: An Application of the ARDL Analysis in the Presence of Structural Breaks - 1980-2005," Economics Working Papers wp06-17, School of Economics, University of Wollongong, NSW, Australia.

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