Equity Investment Regulation and Bank Risk: Evidence from Japanese Commercial Banks

Using data from Japanese banks, this paper empirically investigates the relation between equity investment and bank risk during the period of banking crisis. Empirical evidence suggests that bank risk is positively associated with the ratio of shareholding to equity capital, suggesting that limiting shareholding can reduce commercial banks’ exposure to market risk. However, regulators should not expect that restricting banks from shareholding automatically leads to less bank failures in a financial system. This is because unhealthy banks voluntarily refrain from holding a large amount of firms’ shares relative to their equity capital, and bank risk is less sensitive to shareholding at unhealthy banks than at healthy banks.