`By a Silken Thread': Regional Banking Integration and Credit Reallocation during Japan's Lost Decade

During Japan’s Lost Decade, regional credit reallocation by nationwide (‘integrated’) banks mitigated the real effects from the bank liquidity shock in prefectures with many bank-dependent SMEs. We propose a novel instrument for regional banking integration that exploits the historical segmentation of banking markets in Japan which goes back to the institutions set up for silk export finance in the late 19th century. Our results show how integrated banking markets limit macroeconomic asymmetries in a monetary union during a financial crisis - even if the crisis mainly affects integrated banks (as was the case during the Lost Decade).