Systemic risk and structural changes in a bipartite bank network: A new perspective on the Japanese banking crisis of the 1990s

The Japanese banking crisis in the late 1990s has been considered a significant turning point in the history of Japanese banking system. This period has attracted researcher's interest to study the increase of bad debt on Japanese banks' balance sheets leading to the crisis of the 1990s. Here, we investigate the risk propagating through a bipartite banking network consisting of two kinds of nodes: assets on one hand and banks on the other. Using a Cascading Failure Model (CFM) to describe the propagation of failures in the network, we attempt to understand the main culprit provoking the crisis and the systemic conditions that amplified or repressed the 'chain reaction' of bankruptcies. Based on simulations using the CFM, we find that the asset 'Loans on Bills' was not only the main culprit for the Japanese banking crisis of 1990s but also a critical separator for banks' survival. Furthermore, by using CFM, an abrupt change of the number of bankruptcies appears with just a small change of bank liquidity. This finding indicates a high level of fragility in the banking system, highlighting the importance to consider not only individual banks' asset portfolios but also the connections between banks to guard financial institutions against cascading failures. © The authors 2016. Published by Oxford University Press. All rights reserved.