Article 65 of the Securities and Exchange Law of Japan, which was carried into effect in 1948, prohibited banks from underwriting corporate securities partially because of the concern that combining the banking and securities businesses might result in a potential conflict of interest. This paper studies the pricing and long-term default performance of industrial bonds underwritten by commercial banks, the Industrial Bank of Japan (IBJ), and trust firms as compared to those underwritten by investment houses during the pre-war period in Japan when banks were allowed to underwrite industrial bonds. The evidence rejects the concern about the conflicts of interest.

Using recent data from Japan, this paper examines empirically the determinants of risk taking at commercial banks. We find that the implementation of the capital adequacy requirement reduced risk taking at commercial banks. The acceptance of retired government officials on banks’ boards has an insignificant effect on bank risk. The relationship between the stable shareholders’ ownership and bank risk is nonlinear; the risk decreases initially with the ownership by stable shareholders, and then increases as the asset substitution effect dominates the effect of managerial entrenchment on bank risk. The decline of franchise value increases bank risk.