Risk-taking Behavior in Cooperative Financial Institutions and Financial Stability in Japan: Lessons from the Global Financial Crisis

Author Name OHKUMA Masanori (Okayama University)
Creation Date/NO. October 2017 17-J-064
Research Project The Role of Regional Financial Institutions toward Regional Revitalization: How do regional financial institutions contribute to improving the quality of employment in the local economy?
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This study empirically analyzes the determinants of risk taking in regional financial institutions in Japan, with special emphasis on their ownership form and corporate governance structure. This study finds that cooperative financial institutions were more stable than regional commercial banks during the Global Financial Crisis. Moreover, regional commercial banks with more shareholder-friendly boards were less stable than they would have been otherwise. In contrast, there is no significant association between board characteristics of cooperative financial institutions and their risk exposure. These findings are consistent with theories indicating that bank risk taking increases with the comparative power of shareholders within a bank's corporate governance structure. One may anticipate that weak governance of cooperative financial institutions allows for an accumulation of excess capital at the expense of the interests of member-consumers. However, empirical evidence does not support this view.