Abstract
During Japan’s ‘Lost Decade’, reallocation of credit through the internal capital markets of country-wide banks mitigated the real effects from the bank liqudity shock in prefectures with many bank-dependent SMEs. We document that the regional fragmentation of banking markets in Japan goes back to the institutions set up for silk export finance in the late 19th century. Using silk as an instrument for modern-day regional banking integration, we find even stronger evidence of credit reallocation than in our baseline OLS-specifications. The sign of this OLS-bias is consistent with the underlying heterogeneity in bank-firm matches implied by the theory.
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