The impacts of "shock therapy" under a banking crisis: Experiences from three large bank failures in Japan

A bank failure can have various adverse consequences for clients; these adverse impacts differ depending on which bank takes over the failed banks' operations. In this paper, we show how the new banks' management strategies are important in mitigating the short- and long-run consequences. We focus on the clients of three large failed Japanese banks and examine their responses in terms of increased bankruptcies and changes in market valuation after the banks' operations were taken over. The results imply that the choice of "shock therapy" or "soft budget constraints" had dramatically different consequences in resolving the bad loan problems in Japan.