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Keywords:

  • G21;
  • G38

Abstract

We examine the evidence in equity markets concerning bank regulatory policies in Japan from 1995 to 1999. Our results support the presence of information-based contagion in Japanese equity markets. When the failure of a bank of certain regulatory status was announced, it adversely affected excess returns on banks with equal or lower levels of regulatory protection. Market participants therefore initially behaved as if only second regional and smaller banks would be allowed to fail. As the situation deteriorated, however, banks that traditionally enjoyed greater regulatory protection were also perceived to lose their too-big-to-fail status.