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Vol. 55, No. 2, pp. 155-170 (2004)

“Bank Mergers and Loan Reduction Due to 1927 Bank Law”
Juro Teranishi (The Institute of Economic Research, Hitotsubashi University)

The Bank Law enacted in January 1928 caused a large-scale bank merger movement through stipulating minimum capital and at the same time forbidding the fulfillment of the requirement by new equity issues.
This paper investigates how the bank merger movement was related the decline in lendings, and hence the macroeconomic downtown. The movement caused destruction of existing information channels between banks and borrowers through inducing the reduction of bank capital of smaller banks emerged and through inducing closure of weak and inefficient banks. Although the latter mechanism is efficiency-enhancing in the long run, the former mechanism is not necessarily so.
It is suggested that the rise in intermediation costs and the consequent reduction of bank lending were partly responsible for the recession during 1928-1932.