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

• Published in: Journal of the Japanese and international economies 2003-09, Vol.17 (3), p.233-262
• Main Authors: Brewer, Elijah, Genay, Hesna, Hunter, William Curt, Kaufman, George G.
• Format: Article
• Language: English
• Subjects: Banking system; Banks; Economic networks; Economics; Failure; Financial crisis; International finance
• ISSN: 0889-1583; 1095-8681
• DOI: 10.1016/S0889-1583(03)00024-8

Previous literature suggests that banking relationships can enhance the value of client firms in the presence of asymmetric information problems. Hence, severance of banking ties due to a bank failure can have adverse consequences for the clients of the failed bank. In this paper, we provide evidence on the value of banking relationships by examining the impact of three large bank failures in Japan on their clients and the clients of surviving banks. We find that, as in previous studies, the market value of customers of the failed banks is adversely affected on the date of the failure announcements. In addition, the effects are related to the financial characteristics of both the client firms and their primary banks. 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.