Working Paper

The value of banking relationships during a financial crisis: evidence from failures of Japanese banks

Abstract: In this paper, we provide evidence on the value of banking relationships by examining the stock market valuation impact of three large bank failures in Japan in 1997 and 1998 on their clients and the clients of surviving banks. Bank failures are theorized to have adverse consequences for other firms in general and for customers of the failed institutions in particular. Firms that are customers of the failed institution may be adversely affected because they may lose an ongoing source of funding and need to incur the expense of search and providing financial and other information about themselves to new lenders. Firms that are not customers of the failed bank may be adversely affected because the failure may signal existing but yet unrecognized problems at other banks, ignite problems at other banks through spillover or contagion, or foretell adverse economic conditions for the economy in the region or nationwide. ; Unlike previous studies of this type, we examine the impact of bank failure announcements on the market valuation not only of the client firms of the failed banks but on all firms including the clients of surviving banks. We find that, as in previous studies, the market value of customers of the failed banks is adversely affected at the date of the failure announcements. Firms that have greater access to alternative sources of funding experience a less severe adverse impact from bank failure announcements. Similarly, clients of banks that are more profitable, better capitalized, and have lower loan loss reserves suffer less from the failure announcements. However, we also find that these effects are not significantly different from the effects experienced by all firms in the economy. That is, the bank failures represent \"bad news\" for all firms in the economy, not just for the customers of the failed banks.

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Pacific Basin Working Paper Series

Publication Date: 2002

Number: 2002-09