Efficiency in the Japanese trust banking industry: A stochastic distance function approach

This paper aims to assess the technical efficiency of Japanese trust banks by using the stochastic distance function approach, which is suitable for analyzing complex trust banks but has never applied for Japanese trust banks. Although the trust banking industry has been one of the most restricted financial sectors in Japan, it has recently been deregulated, particularly in terms of entry restrictions. Most noteworthy was the approval of the entry of the foreign-owned trust banks that represented the financial liberalization at that time. The traditional theory expects that allowing new entry makes market more competitive and therefore players become more efficient to survive. Therefore, it is interesting to investigate whether the liberalization made Japanese banks more efficient. The results indicate that the traditional domestic trust banks possess a technical efficiency superior to new entrants (i.e., foreign-owned trust banks). However, we failed to find an apparent tendency for trust banks to be more efficient now than in the pre-liberalization period.Japanese trust banking industry; Deregulation; Foreign-owned banks; Technical efficiency

What kinds of credit associations favor introducing new financial technology?

Since 2003, the Financial Services Agency has set relationship banking enhancement program as an important strategic task to improve the functions of regional financial institutions. In this enhancement program, the FSA recommended that regional financial institutions introduce new financial products such as collateralized loan obligations (CLOs) and collateralized bond obligations (CBOs). However, this was left up to each institution’s discretion rather than being mandatory. This resulted in a large difference in the introduction of new products. Therefore, this paper has analyzed what kinds of credit associations favorably increased the use of new financial products. As a result, it has been confirmed that the larger their lending shares and management scale, and the better their business conditions are, the more positively they work on the introduction of new products. Considering the fact that relationships between financial institutions and enterprises tend to be fixed in Japan, this means that medium and small enterprises will have restrictions on the financial products they can use depending on the situation of their main banks

What kinds of credit associations favor introducing new financial technology?

Since 2003, the Financial Services Agency has set relationship banking enhancement program as an important strategic task to improve the functions of regional financial institutions. In this enhancement program, the FSA recommended that regional financial institutions introduce new financial products such as collateralized loan obligations (CLOs) and collateralized bond obligations (CBOs). However, this was left up to each institution’s discretion rather than being mandatory. This resulted in a large difference in the introduction of new products. Therefore, this paper has analyzed what kinds of credit associations favorably increased the use of new financial products. As a result, it has been confirmed that the larger their lending shares and management scale, and the better their business conditions are, the more positively they work on the introduction of new products. Considering the fact that relationships between financial institutions and enterprises tend to be fixed in Japan, this means that medium and small enterprises will have restrictions on the financial products they can use depending on the situation of their main banks.Small businesses; New financial products; Relationship banking; Credit associations; Japan.

The Economics and Politics of Administered Protection: An Analysis of the Japanese Safeguard System for Agricultural Goods

This paper models the lobbying activity concerning a safeguard measure and applies it to the empirical analysis to see if the monitoring system on a safeguard measure is administered along with the WTO agreement or affected by political factors. The model analysis describes that there exists a potential mechanism that a rise in imports induces a political activity by producers. The empirical analysis shows that the monitoring system on a safeguard measure is not so neutral to the WTO conditions and it is more or less influenced by the political factors.Administered protection, Safeguard, Lobbying, WTO agreement

Why Do Japanese Non-Local Regional Banks Enter Other Prefectures Under the Region-Based Relationship Banking Policy?

In this study, we investigate the market characteristics of prefectures in which non-local regional banks of other prefectures choose to enter and the motivations of such banks for doing so, considering the Japanese government’s requirements for regional financial institutions to play an active role in stimulating local economies. In particular, by pooling prefecture-level data, the market characteristics of prefectures that experience more entrances by non-local regional banks compared with other prefectures are examined. It was found that entrance by non-local regional banks is more common in prefectures where high-performing companies are active. Therefore, it can be considered that non-local regional banks that are not satisfied with lending opportunities in their home prefectures enter other prefectures to increase their lending opportunities to high-performing companies. This study contributes by clarifying why many regional banks do not concentrate on businesses within their local regions and intentionally enter other prefectures, which is in contrast with the intent of the region-based relationship banking policy

Efficiency in the Japanese trust banking industry: A stochastic distance function approach

This paper aims to assess the technical efficiency of Japanese trust banks by using the stochastic distance function approach, which is suitable for analyzing complex trust banks but has never applied for Japanese trust banks. Although the trust banking industry has been one of the most restricted financial sectors in Japan, it has recently been deregulated, particularly in terms of entry restrictions. Most noteworthy was the approval of the entry of the foreign-owned trust banks that represented the financial liberalization at that time. The traditional theory expects that allowing new entry makes market more competitive and therefore players become more efficient to survive. Therefore, it is interesting to investigate whether the liberalization made Japanese banks more efficient. The results indicate that the traditional domestic trust banks possess a technical efficiency superior to new entrants (i.e., foreign-owned trust banks). However, we failed to find an apparent tendency for trust banks to be more efficient now than in the pre-liberalization period

Examining Main Bank Relationships in SME Finance - The Correlation between Efficiency and Lending Attitude among Regional Financial Institutions - (Japanese)

This study examines the main bank relationship in SME finance, targeting solely SMEs using regional financial institutions (regional banks, second-tier regional banks, and credit associations) as their main banks and empirically analyzing the correlation between main bank efficiency and lending attitude. Conventionally, individual financial statement information such as non-performing loan ratios and capital adequacy ratio were used as indicators of the soundness of main banks in the previous literature, but cost efficiency calculated using a stochastic frontier approach is a superior indicator for showing differences in relative soundness, since this indicator is derived from and reflects the production cost structure of the banking industry as a whole. The empirical results gained from this study can be summarized as follows: Firstly, when the relationship between indicators such as non-performing loan ratios and cost efficiency was examined to check the use of cost efficiency as an indicator of soundness, it was confirmed that cost efficiency is a comprehensive indicator significantly influenced by key balance sheet information. Secondly, concerning the impact of cost efficiency on lending attitude, it became evident that the more cost efficient the main bank, the more positive a response it gave to borrowers' requests for additional funds. Further, the results showed that the more cost efficient the main banks, the more they tended to place less severe demands on borrowers in terms of existing borrowing arrangements. Finally, with regard to the correlation between lending attitude and changes in a main bank's cost efficiency, it has been suggested that main banks that raised short-term interest rates on existing loans or requested to increase savings were more likely to improve their cost efficiency in the following fiscal year.

Roles of Outside Directors in Cooperative Financial Institutions

As the governance of financial institutions is becoming an important issue, there are many papers empirically investigating the governance issues of banks, which are stock companies. However, cooperative structured financial institutions (co-ops), which have a unique governance structure different from stock companies, play a substantial role in the Japanese banking markets, and, therefore, it is worth examining whether some governance scheme developed for stock companies are effective at cooperative financial institutions. Our results showed that the presence of outside directors at co-ops (“Shinkin Banks”) contributes to an improvement in efficiency