A case study of the Japanese bank recapitalization by Hoshi and Kashyap (2005) identified a bank that overstated the progress of required personnel downsizing by shifting employees to subsidiaries. This paper asks if the recapitalization program had a systematic flaw in design.
We focus on regional banks with a unique panel dataset of 82 banking groups that allows us to observe the employment levels of subsidiaries, in addition to those of parent banks, over fiscal 1994–2006. We estimate a labor-demand equation with sluggish adjustment to compare the employment patterns of public capital recipients and other banks. We found 4 banks increased subsidiary employment after receiving capital injection, but only temporarily. This temporary effect suggests that the personnel shift- ing was essentially layoffs. Our finding indicates that, despite the limited transparency of personnel sizes on the consolidated basis, rules on capital injection provided incentives for most recipients to pursue downsizing.