The Too-Big-to-Fail Doctrine vs Bageoht (1873)'s Rule : the case of the panic of 1927
I have uploaded my new discussion paper to SSRN.
The paper examine determnants of bank bailouts by the bank of Japan in response to the panic of 1927 using a data set consisting of observations on 1364 ordinary banks. The results by tobits how that the Bank of Japan provided liquidity support not for lenders but for borrowers in the call market, and that rescued banks had higher closure risk and more deposits. Bank bailouts in response to the panic of 1927 was to practice the "too-big-to-fail" doctrine on the oremise that lenders in the call market would recover liquidity performance by the self-help efforts.
The major challenge in recent studies on liquidity shocks is the lack of detailed data on interbank activities during the crises. I notice a handbook for bankers at the time. While there is no centralized record-keeping on bank activities in the interbank market during the panic of 1927, the handbook has listed banks for three categories: dashite (lenders in the call market), torite (borrowers), and dashite-oyobi-torite (borrowing-lenders). Based on these three lists, I have created group dummy variables as indicators of activities in the call market during the panic.
There is another problem of exploraring determinants of the LLR (lender-of-last-resort) assistance. Decision process of the LLR assistance maight cause the sample selection problem. As a initial selection mechanism, banks had to decide whether to apply for the LLR support. In the next stage, the LLR would decide whether to rescue. There could be three bank groups: (Y1)banks that did not apply for the LLR assistance; (Y2)banks that were declined the assistance; and (Y3)rescued banks. If the empirical studies ignore an initial selection mechanism, they might lead to misspecification since the untreated group might comprise more healthy and more unhealthy banks. In this situation, the treatment-effects regression could be useful (Vossmeyer 2016). On the other hand, the data on applicants for toku-yu are not available. The empirical studies need other alternatives. I use the propensity score to close during the panic period as the proxy on applying the LLR assistance.
The Results are not consistent with those of empirical studies by Okazaki (2007). My paper points out that Okazaki (2007) has faced the sample-selection problem. Okazaki (2007) emphasized that the Bank of Japan adopted Bageoht (1873)'s rule after the panic of 1927. This conclusion is wrong. The Bank of Japan did not provide liquidity support for sound banks.
Two Traditional and New Views on Banking Panics
It is better to be cautious about characterizing one historcal event with statistical tests. We set null and alternative hypotheses in limited views.
There have been two traditional views on banking panics One is the sunspot-based view (Diamond and Dybvig 1983). In this view, random withdrawals could be triggered by depositors with self-fullfilling motivation. And the other is the information-based view (Gordon1988). In this view, bank runs could be triggered by some signals on expected return of bank portfolio.
Many empirical studies have tested these views, and the resuls show that fundamentals could explain bank suspension or financial crisies well. Then, is it ridiculous to to worry about random-withdrawals? Can we say that the random-withdrawals view is wrong?
Some papers develope Diamond and Dybvig (1983)'s model using global game methods while most papers support the information-based views before the Crisis of 1998 or of 2008 ( Goldstein and pauzner 2005; Morris and Shin 2006). In this new view, random withdrawals could be triggered by fundamentals shock. This means that some banking panics, which have been regarded as information-based events, might be characterized as some self-fullfiling activities. Contagion effects during the panic or interbank activites come to be explained by fundamental factors.
Theoretical researches could evolve as well as empirical studies. There is no need to stick to two opposing theories. We are able to, (or have to) provide more evidence for new theories. This is so simple. On the other hand, when some paper show the results of hypothesis tests, we often forget this simple thing.
Japanese Colonialism in Comparative Perspective
Some argue that prewar Japanese colonial policy was developmental in Taiwan and the Republic Korea and Taiwan. For example, Landes (1998) has assumed that the stellar performance of these two economies since 1960 must be due to the Japanese legacy. Other related studies emphasizes the positive aspects of the Japanese legacy, including the agricultural transformation, as well as the development of industry and transport infrastructure.
Booth and Deng (2016) compare some economic indicators in Korea, Taiwan and Manchuria with those from other Asian colonies, and deny that Japanese policies were uniformly more developmental than the policies pursued by other colonial powers in Southeast Asia.
As shown in Table 1(Booth and Deng 2016), growth in per capita GDP was positive
between 1913 and 1929 in most parts of colonial Asia with Taiwan having the fastest growth and India the slowest. This is consistent with the assumption of Landes (1998).
On the other hand, Korean growth until 1929 was no faster than in the Philippines, and not much different from Burma or Indonesia.
Korea and Taiwan were different from each other. Table 7 shows that per capita consumption expendityres, rice intake, and crude death rate. It indiates that economic outcomes under Japanese colonial policy might more effective in Taiwan.
Wheteher prewar Japanese colonial policy was "developmental"will be discussed futher in the future.
