Political Influence and Declarations of Bank Insolvency in Japan

This paper investigates how politics affects bank supervision by examining determinants of bank failures in Japan during 1999–2002, a period during which bank regulators were called upon to resolve insolvent banks in preparation for the lifting of a blanket deposit guarantee. The empirical results suggest that Japan's bank regulators had tendency to delay declarations of insolvency in prefectures that supported senior politicians of the ruling Liberal Democratic Party (LDP). This result, which is robust to a host of bank‐level and prefecture‐level controls, suggests that bank supervision is prone to political influence that delays efficient resolution of insolvency.