RIETI Policy Symposium

Japan's Financial System: Revisiting the Relationship between Corporations and Financial Institutions

Information

  • Time and Date:
    Thursday, February 16, 2006, 13:30-17:10
    Friday, February 17, 2006, 9:00-17:00
  • Venue:
    Hall, Shinsei Bank (1st Floor, Head Office, 2-1-8 Uchisaiwaicho, Chiyoda-ku, Tokyo)
  • Language:
    Japanese / English (with simultaneous interpretation)

Summary of Proceedings

Session 4: Is the market for indirect financing competitive? Impact of the restructuring of financial institutions

Session Chair: UEMURA Shuichi (Senior Fellow, RIETI)

Presentation 1: TSUTSUI Yoshiro (Faculty Fellow, RIETI / Professor, Institute of Social and Economic Research, Osaka University)
"Financial institutions and contestability of the financial market"

Presentation 2: TSURU Kotaro (Senior Fellow, RIETI)
"Consolidation of cooperative (shinkin ) banks in Japan: Causes and consequences"

Presentation 3: Allen N. BERGER (Senior Economist, Financial Studies Section, Division of Research and Statistics, The Federal Reserve Board)
"Effects of bank mergers and acquisitions on small business lending"

Comments: TAKATA Hajime (General Manager / Chief Strategist, Fixed Income Research Dept., Fixed Income Group, Mizuho Securities Co., Ltd.)

Session Summary

Three presentations were made during the session from the critical perspectives set out below. The presentations examined effects of financial institutions' mergers and acquisitions on small business lending, employing corroborative evidence, examples, and system research.

  • Is Japan's indirect financial market still oligopolistic, or have certain types of institutions still continued to coexist in their respective areas?
  • Have mergers of regional financial institutions returned benefits to their users through prices by way of the improvement of management performance, or contributed to the stabilization of regional financial systems?
  • Should the enlargement of the scale of a bank or a change in ownership through reorganization be considered to have a negative impact on borrowing by SMEs?

Outline: Professor TSUTSUI Yoshiro presentation

The Prof. Tsutsui's presentation was on the subject of "Financial institutions and contestability of the financial market," setting out the following points.

Japan's local lending market is considered to be segmented by region. Kano and Tsutsui (2003) found that shinkin banks' loan markets are segmented by prefecture, whereas the loan markets of regional banks are not. This result is consistent with the fact that shinkin banks operate almost entirely within each prefecture, while regional banks operate through branches also in adjacent prefectures. These findings are sourced in data for the 1996 fiscal year, while the findings of Ishikawa and Tsutsui (2005) indicate that the loan market is segmented by prefecture, based on estimates of loan provision and the demand function for each prefecture between 1990 and 2001.

These results may give rise to the assumption that whereas competition in the national market is severe, competition in the segmented regional market is more moderate. With regard to this point, Uchida and Tsutsui (2005) used data between 1974 and 2000 to make estimates of the degree of competition of city banks and regional banks, finding that for city banks competition became severe from 1980, and did not reject perfect competition, while the competition for regional banks was not as severe as for city banks, and Cournot competition was rejected. Kano and Tsutsui (2003) also demonstrated the validity of the market structure-performance hypothesis, namely that the more concentrated the market in a prefecture is, the higher the interest rates of shinkin banks. In other words, even in markets segmented by prefecture, the greater the degree of concentration, the more oligopolistic rates are applied.

Targeting city banks between the 1974 and 2001 fiscal years, Tsutsui, Satake, and Uchida (2005) examined whether the efficiency hypothesis and the market structure-performance hypothesis were valid. They found that the efficiency hypothesis is partially supported, while the market structure-performance hypothesis is generally not supported. This finding suggests that competition by city banks maintains efficiency, in that efficient banks triumph and increase in size. Whether or not this trend can be identified in regional financial institutions remains an interesting issue to be studied.

Outline: Dr. TSURU Kotaro presentation

Dr. Tsuru's presentation was on the subject of "Consolidation of cooperative (shinkin ) banks in Japan: Causes and consequences."

He made detailed analyses of three points. (1) What are motivations for shinkin bank mergers? (2) What effects have mergers had? (3) What type of shinkin bank merger combinations have their performance improved? The results of these can be outlined as follows.

The characteristics of shinkin banks that were merger targets included low ROA, cost ratios and capital ratios relative to shinkin banks not involved in mergers, and also small scale. Similarly, shinkin banks that initiated mergers also had low ROA, cost ratios, and capital ratios. However, their characteristic feature was that they were large in scale.

The effect of mergers could be seen in improvements in cost ratios. On the other hand, capital ratios tended to deteriorate. No differences in ROA before and after mergers could be detected.

Cases in which performance improvements were seen after a merger were when the combinations involved large performance gaps between the acquirer and acquiree shinkin banks. This finding supports the "relative performance hypothesis," which in this case means that poorly performing acquiree shinkin banks learn from the good aspects of the acquirer shinkin banks, and post-merger performance improves.

Loan interest rates increased after mergers in the latter half of the 1990s. This presents a major problem from the perspective of competition policy.

Outline: Dr. Allen N. BERGER presentation

Dr. Berger's presentation was on the subject of "Effects of bank mergers and acquisitions on small business lending," during which he focused on advanced research being conducted overseas concerning (1) the effect of conventional mergers (mergers in which small and medium-sized banks are transformed into big banks) and (2) the effect of acquisitions of domestic banks by foreign banks, and he set out the following points.

In analyzing this theme it is important to identify comparative advantage according to type of bank. This is because by such means as M&A and takeovers the type of bank can change from small or medium-sized bank to large bank, or from domestic bank to foreign bank, or from state-owned bank to private sector bank.

In general, large banks have comparative advantage in hard information-lending technologies, while small and medium-sized banks have comparative advantage in soft information-lending technologies. Foreign banks have comparative advantage in hard information-lending technologies in developing countries, but in industrialized countries there is no difference between them and domestic large banks.

Conventional mergers in the U.S. lead to a decrease in lending to SMEs by the merging banks, but in place of this the lending to SMEs by other banks increases, and therefore the overall net effect on SME credit availability is approximately zero.

The effect of the acquisition of domestic banks by foreign banks is positive in developing countries. In developing countries the hard information-lending technologies of domestic banks are immature. Domestic banks acquired by foreign banks come to absorb the foreign banks' know-how and become capable of lending to SMEs to which they were not able to lend previously.

Outline: Comments by Mr. TAKATA Hajime

In Mr. Takata's comments with regard to the subjects addressed in Session 4, the following points were made from a hands-on perspective of the realities on the ground.

Looking at regional shares of loans there are considerable disparities between prefectures. This shows that there are gaps in competitive conditions from region to region, and therefore we must be aware when we use the word "region" sweepingly that the environment for each is different.

Market rates of interest, represented by the yield on government bonds, remain low, but have been increasing gradually since hitting bottom in 2003. Nevertheless, interest rates on newly contracted loans have been declining over the past year. This is very troubling for financial institutions on the ground, and is a situation that needs to be subjected to serious debate in the future.

Postal savings and agricultural cooperative organizations account for two-thirds of the total number of offices of financial institutions. This fact will be an important topic for debate when considering the future organization of the industry.

(This report compiled by WATANABE Yoshitsugu)