1. Introduction

There were two obvious inefficiencies in the Japanese banking behavior of the 1990s: the credit crunch and the loan evergreening. A credit crunch occurs when banks are reluctant to finance good projects, while loan evergreening implies the extension of additional credit to poorly performing firms. These two inefficient forms of banking behavior seem perverse and contradictory. In this book, we will provide a theoretical explanation of the reason for such banking behaviors and demonstrate that these seemingly contradictive banking behaviors are a consistent reflection of the violation of the absolute priority rule (APR) of Japan in the 1990s. To lay the foundation for the precise theoretical argument, we present the intuitive explanation and fundamental structure of the model for the analysis of these banking behaviors in this chapter. In this book, we consistently insist on the importance of the absolute priority rule. Thus, we first explain our awareness for relationship between banking behaviors and the absolute priority rule based on the experience of Japan in the 1990s.