Amakudari as a signal: possible malfunctioning of the amakudari practice under the limited deposit insurance system

Abstract

We analyse the amakudari practice in Japan focussing on the banking industry where officials from the regulatory authority obtain post-retirement jobs in private banks. A theoretical model is developed to investigate a new role that amakudari might play following the introduction of limited deposit insurance in 2005. It is generally expected that changing deposit insurance from full to limited will discipline Japanese banks' risk-taking behaviour because depositors will start monitoring their banks. However, our game-theoretic analysis suggests the possibility that this disciplinary effect could be reversed by the new role that amakudari may play. We assume that depositors are unsure about banks' riskiness and infer their riskiness from observing whether or not they hire amakudari officials, i.e. these amakudari officials play a crucial role as a signal to depositors. This signal, however, might malfunction. We show that, in order to create more post-retirement employment opportunities for their officials, the regulatory authority may weaken prudential regulation. Ironically and unexpectedly, the introduction of limited deposit insurance may make the whole banking industry riskier.