The Enigma of Japanese Bank Lending

Abstract

Standard economic models assume that banks are financial intermediaries and as such rationally maximize their profits by minimizing risks and maximizing returns from asset allocation of their portfolio. Many economists have been arguing that the lending behaviour of banks during the 1990s has been in line with these models. Banks, it was argued, were not able to locate enough low-risk borrowers, so that overall credit growth failed to materialize. While there has been a dearth of empirical studies, it is conceivable that some empirical support could be found for this argument. Nevertheless, this explanation can only ever be a partial answer, since the true cause remains unexplained: why were there not enough low-risk borrowers?