ABSTRACT Japan experienced a bubble economy in the late 1980s and a financial crisis in the 1990s, and the banking supervision system was criticized for failing to prevent excessive risk-taking behavior among commercial banks. In this study, I examine whether, and if so why, the banking supervision system deteriorated over the period in question, focusing on human capital, especially among the elites, in relation to banking supervision in Japan. I focus on two elements of banking supervision: the transition of supervisory policy and the characteristics (e.g. education, career path) of the heads of supervisory departments. The 49 Directors of the Financial Inspection Department in the MOF from 1927 to 1998 and the 26 Directors-General of the Bank Examination Department in the BOJ from 1928 to 1981 are analyzed. I also analyze the performance of several regional banks that appointed an ex-Director of the MOF as their president to check whether such an intimate bank – supervisor relationship worsened those banks’ management. The results showed no evidence of bad management as a result of that relationship. Rather, an increased burden on examiners and a reduced awareness of the importance of risk management led to the reduced effectiveness of banking supervision.
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