This article assesses the program for Financial Revival (PFR) of the Japanese banks. To achieve the programme's goal of maximizing banks' profits, the government can inject capital and reduce bad loans of banks subject to the government budget constraint. We conclude that the government can achieve the programme's goal only in areas where the Bank for International Settlements (BIS) capital ratio regulations are binding. The government should restrain to reduce bad loans when the unit price of doing so increases and cannot maximize depositors' or borrowers' surpluses together with banks' profits. The Basel II Framework enhances banks' profits under the programme. The empirical evidence indicates that the necessary condition for achieving the programme's goal is satisfied.
ASJC Scopus subject areas