Priority Rule Violations and Perverse Banking Behaviors: Theoretical Analysis and Implications of the 1990s Japanese Loan Markets

90 Pages·2017·2.42 MB·English

by  Hiroyuki Seshimo, Fukuju Yamazaki

SPRINGER BRIEFS IN ECONOMICS
DEVELOPMENT BANK OF JAPAN RESEARCH SERIES
Hiroyuki Seshimo
Fukuju Yamazaki
Priority Rule Violations
and Perverse Banking
Behaviors
Theoretical Analysis and
Implications of the 1990s
Japanese Loan Markets
SpringerBriefs in Economics
Development Bank of Japan Research Series
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Hiroyuki Seshimo Fukuju Yamazaki
(cid:129)
Priority Rule Violations
and Perverse Banking
Behaviors
Theoretical Analysis and Implications
of the 1990s Japanese Loan Markets
123
HiroyukiSeshimo FukujuYamazaki
Schoolof Commerce Collegeof Economics
SenshuUniversity NihonUniversity
Tokyo Tokyo
Japan Japan
and and
Research Institute of Capital Formation Research Institute of Capital Formation
Development Bankof Japan Development Bankof Japan
Tokyo Tokyo
Japan Japan
ISSN 2191-5504 ISSN 2191-5512 (electronic)
SpringerBriefs inEconomics
ISSN 2367-0967 ISSN 2367-0975 (electronic)
Development Bankof JapanResearch Series
ISBN978-981-10-5851-6 ISBN978-981-10-5852-3 (eBook)
DOI 10.1007/978-981-10-5852-3
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Acknowledgements
This research was supported by JSPS KAKENHI Grant Number (25245043,
25285083, 26504011). We are deeply grateful to Prof. Toshihiro Ihori for the
helpful review for our draft and the participants of the review conference for
valuablecomments.WealsoexpressourthankstoProf.KiyoshiMitsuiforhelpful
commentsinourearlyversion.ThestudyinChap.5isbasedonthejointresearch
withShigeruSugiharaandTomoyukiOhta.Weappreciatetheseco-authorsandthe
Institute of Economic Research, Hitotsubashi University, for their permission to
partially translate the empirical results of the study. I would also like to thank the
editors of SpringerBriefs in Economics DBJ Research Series for offering us the
opportunity to publish this book. All remaining errors are our own.
v
Contents
1 Introduction.... .... .... ..... .... .... .... .... .... ..... .... 1
1.1 Credit Crunch and Loan Evergreening in Japan
in the 1990s ... .... ..... .... .... .... .... .... ..... .... 1
1.2 Related Literature... ..... .... .... .... .... .... ..... .... 2
1.3 Fundamental Structure of the Theoretical Model .... ..... .... 3
1.4 Existing Alternative Explanations for the Japanese Banking
Behavior.. .... .... ..... .... .... .... .... .... ..... .... 4
1.5 Outlook of the Book. ..... .... .... .... .... .... ..... .... 5
References.. .... .... .... ..... .... .... .... .... .... ..... .... 6
2 Examples of APR Violation in Japan in the 1990s.. .... ..... .... 7
2.1 Introduction ... .... ..... .... .... .... .... .... ..... .... 7
2.2 Short-Term Tenancy Protection (Tanki Chinshaku Ken
in Japanese) ... .... ..... .... .... .... .... .... ..... .... 8
2.3 Mortgages with no Residual Distribution.. .... .... ..... .... 10
2.4 The Misuse of the Going-Concern Value by Bankruptcy
Courts.... .... .... ..... .... .... .... .... .... ..... .... 12
2.5 The Jusen Housing Loan Companies Problem.. .... ..... .... 12
2.6 Conclusions ... .... ..... .... .... .... .... .... ..... .... 13
References.. .... .... .... ..... .... .... .... .... .... ..... .... 14
3 Fundamental Structure of Our Model and the Result
in the Case with no APR Violations.. .... .... .... .... ..... .... 15
3.1 Introduction ... .... ..... .... .... .... .... .... ..... .... 15
3.2 Basic Model... .... ..... .... .... .... .... .... ..... .... 16
3.2.1 Fundamental Structure of the Model.... .... ..... .... 16
3.2.2 Debt Contract ..... .... .... .... .... .... ..... .... 17
3.2.3 Procedure in the Model.. .... .... .... .... ..... .... 18
3.2.4 The Debtor’s Behavior .. .... .... .... .... ..... .... 20
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viii Contents
3.3 The Case of no APR Violation.. .... .... .... .... ..... .... 20
3.4 Conclusions ... .... ..... .... .... .... .... .... ..... .... 23
Appendix 3.1: Proof of Lemma 3.0 ... .... .... .... .... ..... .... 23
Appendix 3.2: Proof of Proposition 3.1 .... .... .... .... ..... .... 24
Appendix 3.3: Proof of Proposition 3.2 .... .... .... .... ..... .... 24
Appendix 3.4: Proof of Proposition 3.3 .... .... .... .... ..... .... 25
References.. .... .... .... ..... .... .... .... .... .... ..... .... 26
4 Economic Analysis of Excess Additional Credit
(Loan Evergreening). .... ..... .... .... .... .... .... ..... .... 27
4.1 Introduction ... .... ..... .... .... .... .... .... ..... .... 27
4.2 Structure of Postponing the Bad Loan Problem . .... ..... .... 29
4.3 Excess Additional Credits and the Decision to Liquidate... .... 33
4.4 Comparative Statistics of the Magnitude of APR Violation
for Inefficient Additional Lending.... .... .... .... ..... .... 35
4.5 Credit Crunch Caused by the Inefficient Additional Lending
Problem .. .... .... ..... .... .... .... .... .... ..... .... 37
4.6 Conclusions ... .... ..... .... .... .... .... .... ..... .... 38
Appendix 4.1: Proof of Lemma 4.1 ... .... .... .... .... ..... .... 39
Appendix 4.2: Proof of Lemma 4.2 ... .... .... .... .... ..... .... 39
Appendix 4.3: Proof of Lemma 4.3 ... .... .... .... .... ..... .... 41
Appendix 4.4: Proof of Proposition 4.4 .... .... .... .... ..... .... 42
References.. .... .... .... ..... .... .... .... .... .... ..... .... 42
5 Empirical Evidence.. .... ..... .... .... .... .... .... ..... .... 43
5.1 Introduction ... .... ..... .... .... .... .... .... ..... .... 43
5.2 Empirical Implications .... .... .... .... .... .... ..... .... 45
5.3 Alternative Empirical Hypothesis.... .... .... .... ..... .... 47
5.4 The Strategy and Procedures of the Empirical Analysis.... .... 49
5.5 Sample Division by Periods.... .... .... .... .... ..... .... 50
5.6 Regression Equation. ..... .... .... .... .... .... ..... .... 51
5.7 Data Arrangements.. ..... .... .... .... .... .... ..... .... 52
5.8 Estimation Method.. ..... .... .... .... .... .... ..... .... 53
5.9 Results ... .... .... ..... .... .... .... .... .... ..... .... 55
5.10 Conclusions ... .... ..... .... .... .... .... .... ..... .... 58
References.. .... .... .... ..... .... .... .... .... .... ..... .... 59
6 DIP Finance, Optimal Priority Rule, and Implications
for Japanese Legal Reforms.... .... .... .... .... .... ..... .... 61
6.1 Introduction ... .... ..... .... .... .... .... .... ..... .... 61
6.2 Legal Priority Violation Versus Voluntary Debt Forgiveness.... 63
6.3 DIP Finance and Accurate Adequate Protection. .... ..... .... 65
6.4 Japanese Legal Reforms Related to Fundraising in the 2000s.... 68
Contents ix
6.4.1 The Revision of the Supreme Court Judgment ..... .... 68
6.4.2 Bankruptcy Law Reform. .... .... .... .... ..... .... 70
6.4.3 Collateral Law and the Enforcement Procedures.... .... 73
6.5 Conclusions ... .... ..... .... .... .... .... .... ..... .... 76
Appendix 6.1: Proof of Proposition 6.2 .... .... .... .... ..... .... 77
References.. .... .... .... ..... .... .... .... .... .... ..... .... 78
7 Concluding Remarks. .... ..... .... .... .... .... .... ..... .... 79
Reference .. .... .... .... ..... .... .... .... .... .... ..... .... 80
About the Authors
HiroyukiSeshimo isaProfessorofEconomicsandFinance atSenshu University
and visiting scholar of the Research Institute of Capital Formation, Development
Bank of Japan. His main areas of research are finance, urban economics, law and
economics, and monetary economics. Born in 1967, Prof. Seshimo received a
Bachelor’s degree in economics from Sophia University in 1990 and a Ph.D. in
economics from Keio University in 2004. He was appointed Professor of
Economics at Senshu University in 2005.
Fukuju Yamazaki is a Professor of Economics at the College of Economics,
Nihon University of Tokyo. His research areas are urban economics, land and
housing economics, and law and economics. Born in 1954, he received a
Bachelor’s degree in economics in 1976 and a Ph.D. in economics from Sophia
University in 2000. He was a Lecturer, an Assistant Professor, and a Professor of
Economics at Sophia University from 1983 to 2012 and appointed a Professor
Emeritus of Sophia University.
xi