It is said among historians, that there are two remarkable innovations in modern finance: deposit banking in southern Europe and negotiable bills in northern Europe, especially Antwerp. Although negotiable bills are as important as deposit banking (because they became a foundation of modern commercial banking and stock markets), they are not often studied. Part I of the thesis studies indirect loan contracts which do not rely on either bank-specific technologies or legal protection. It focuses on the concept of negotiability and explains its characteristics, including the substitutability of deposit banking and negotiable bills. Negotiable bills, or resaleable bills, can be interpreted as an indirect loan contract. The buyer of the bill, i.e. the initial lender, can re-sell the bill to a third party to satisfy his liquidity needs. So the initial issuer of the bill borrows from a third party, through the initial lender (acting as an intermediary). Previous studies have focused on direct loan contracts: between banks and borrowers, depositors and banks, or suppliers and buyers. There are few papers studying the incentive problems faced by all three players. To fill this gap, in Chapter Two, we study indirect loan contracts that a lender and a borrower can make only through an intermediary agent, where the borrower and the lender cannot observe any transaction between the other two. Under this severe information asymmetry, the existence of loan contracts as a sequential equilibrium is proved, although they are less efficient compared with direct loan contracts. In Chapter Three, we consider role of collateral in improving efficiency. Chapter Four concludes, summarising the characteristics of these contracts: only less risky borrowers can issue negotiable bills and riskier borrowers need to seek a direct relationship with lenders (or, they are rationed).\ud In the 1990s, the Japanese economy experienced a prolonged recession, the so-called ’lost decade’. It is discussed that a cause of the problem was the ”zombie lending” problem: chronic loss-making firms (zombies) still obtained finance from their banks. Part II of the thesis aims to address the following issues with a microeconomic model. Firstly, why did banks not liquidate bankrupt borrowers? Secondly, how did it affect macroeconomic productivity? And thirdly, how did it affect the procyclicality of land prices as in Kiyotaki and Moore(1997)’s credit cycle? A bank, in this model, has an incentive not to liquidate insolvent borrowers: the liquidation of collateral asset (land) will invite the collapse of land market and the bank has to bear a large loss. The loss may make the bank under-capitalised and force it to close its business. The bank, to avoid the forced closure, does not liquidate insolvent borrowers. This ”zombie borrowers” occupy their land unused, and the bank can squeeze land supply to push up land price: the bank’s own capital is then kept higher than it should be. In the final chapter, based on this model, optimal post-crisis policies are discussed by comparing two options; public capital injection and toxic asset purchasing scheme
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