The paper By a Silken Thread: regional banking integration and  credit reallocation during Japan’s lost decade (with Toshihiro Okubo),  has been accepted by the  Journal of International Economics.

We show how the geographical reallocation of credit dampened regional heterogeneity in business cycles during Japan’s lost decade. Even though large, country-wide (“integrated”) banks were most affected by the property crisis in the major cities, they reduced their lending less in areas where they had many bank-dependent SME customers all while reducing credit to big corporates who increasingly turned to bond issuance.

We instrument for regional banking integration by exploiting that the regional segmentation of Japan’s banking markets goes back to the local cooperative financial institutions that financed the silk industry in the late 19th century. Banking in the former silk regions was effectively less integrated with the rest of the country at the end of the 20th century. Our results show that well-integrated banking markets help stabilize a monetary union, also and in particular during a financial crisis.