RECIPROCAL DELEGATED MONITORING IN THE JAPANESE MAIN BANK SYSTEM

This paper characterizes the Japanese main bank system as an arrangeme nt for facilitating reciprocal delegation of monitoring among a set of banks. Reciprocal delegated monitoring allows banks and firms to rema in diversified while ensuring that monitoring takes place without dupl ication, but when monitoring is unobservable, it induces a principal-a gent relationship between non-main banks and the main bank. The conven tion that the main bank bears a disproportionately large share of bank losses is viewed as being part of a contractual arrangement among ban ks designed to give the main bank adequate incentives to carry out mon itoring on behalf of lending banks as a whole. (C) 1994 Academic Press , Inc.