The impact of Japan's financial stabilization laws on bank equity values

Abstract

In the fall of 1998, two important financial regulatory reform acts were passed in Japan. The Financial Reconstruction Act created a bridge bank scheme and provided funds for the resolution of failed banks. The Rapid Recapitalization Act provided funds for the assistance of troubled banks. These acts provided government assistance to the banking sector and called for reforms aimed at strengthening the regulatory environment. Using an event study framework, we examine the anticipated impact of these regulatory reforms. Our evidence suggests that the Financial Reconstruction Act was expected to hurt large banks, while the anticipated impact of the act by financial strength was mixed. In contrast, the anticipated impact of the Rapid Recapitalization Act was expected to be antireform, as news favorable to its passage disproportionately favored large and weak Japanese banks.