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Bank Risk and the Declining Franchise Value of the Banking Systems in the United States and Japan

Author

Listed:
  • Mr. Howard Lee
  • Ms. Liliana Rojas-Suárez
  • Mr. Steven Riess Weisbrod

Abstract

This paper associates both the increase in risk taken by wholesale banks in the United States and the decline in earnings at wholesale banks in Japan with a reduction in the franchise value of wholesale banking. In contrast with the conventional view that relates the franchise value of banking to informational advantages over other lenders, this paper argues that banks’ franchise value originates in their provision of liquidity and payments services to their customers. Therefore, the decline in corporate demand for bank liquidity is identified as a major factor explaining the fall of the franchise value. The paper also analyzes recent proposals for banking reform and assesses their relevance for dealing with the problems of wholesale banks.

Suggested Citation

  • Mr. Howard Lee & Ms. Liliana Rojas-Suárez & Mr. Steven Riess Weisbrod, 1992. "Bank Risk and the Declining Franchise Value of the Banking Systems in the United States and Japan," IMF Working Papers 1992/045, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1992/045
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    Citations

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    Cited by:

    1. Rubi Ahmad & M. Ariff & Michael Skully, 2008. "The Determinants of Bank Capital Ratios in a Developing Economy," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 15(3), pages 255-272, December.
    2. Kumar, R. & Debroy, B., 1999. "The Asian Crisis: an Alternative View," Papers 59, Asian Development Bank.
    3. Konishi, Masaru & Yasuda, Yukihiro, 2004. "Factors affecting bank risk taking: Evidence from Japan," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 215-232, January.
    4. Ali Awartany & Khaled Alzubi, 2020. "The Determinants of Bank Risk Taking: Evidence From Jordan," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(6), pages 100-115, December.
    5. Caprio, Gerard Jr. & Summers, Lawrence H., 1993. "Finance and its reform : beyond laissez-faire," Policy Research Working Paper Series 1171, The World Bank.
    6. Horiuchi, Akiyoshi & Shimizu, Katsutoshi, 1998. "The deterioration of bank balance sheets in Japan: Risk-taking and recapitalization," Pacific-Basin Finance Journal, Elsevier, vol. 6(1-2), pages 1-26, May.
    7. Caprio Jr., Gerard, 1998. "Banking on crises : expensive lessons from recent financial crises," Policy Research Working Paper Series 1979, The World Bank.

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