Bank charter value and the viability of the Japanese convoy system

Abstract

This paper compares the performance of a convoy banking system, similar to that which prevailed in Japan, to a fixed-premium deposit insurance regime. Under this system, failed banks are merged with healthy banks, rather than closed, so that the banking system itself provides the safety net for guaranteed deposits. While neither regime is generally preferable over the other, the results show that the performance of the convoy system is more sensitive to changes in bank charter values and the overall health of the banking system. The recent breakdown of the convoy system may therefore be partly attributable to adverse changes in these characteristics in the Japanese banking system.Banks and banking - Japan