Test of the Efficiency Structure Hypothesis with an Application to Japanese Major Banks

Author Name TSUTSUI Yoshiro  (Faculty Fellow) /SATAKE Mitsuhiko  (Professor, Ryukoku University) /UCHIDA Hirofumi  (Associate Professor, Wakayama University)
Creation Date/NO. September 2005 05-J-027
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This paper examines whether the efficiency structure hypothesis holds true for Japanese major commercial banks using a panel data set covering the period from fiscal year 1974 to 2001. The efficiency structure hypothesis has been hitherto mostly examined in comparison with the structure-conduct-performance (SCP) hypothesis in the framework that determines which of the two measurements - the degree of market concentration or market shares - better explains market performance such as profits and interest rates. In this paper, we point out some problems of this framework and examine the efficiency structure hypothesis in a more straightforward manner by focusing on the proposition that the more efficient a bank the more it grows. First, we estimated organizational inefficiencies and the diseconomy of scale for each major bank using the panel data set. Then, we examined how these estimates for a certain bank in a certain year affect the bank's size in the next year. The regression analysis, in which the organizational inefficiencies and the diseconomy of scale in the preceding fiscal year are linked to the reduced-form equation for bank loans, has found that organization inefficiencies adversely affect the amount of bank loans, just as expected. However, contrary to our expectation, the impact of the diseconomy of scale vis-a-vis bank loans has turned out to be positive. Meanwhile, we have found that both organizational inefficiencies and the diseconomy of scale have a negative impact on the amount of bank assets, which is consistent with the efficiency structure hypothesis.