Understanding the rise and decline of the Japanese main bank system: The changing effects of bank rent extraction

► We model how bank rent extraction affects firm financing and investment efficiency. ► Main banks help mitigate classic underinvestment problems despite rent extraction. ► Abundant funds fuel main bank controlled overinvestment due to rent extraction. ► Financial deregulation is well intentioned and weakens the influence of main banks. ► The “equity for upside potential and bank debt for downside risk” bias hurts banks.