The Fall of Organ Bank Relationships During the Wave of Bank Failures and Consolidations: Experience in Pre-War Japan
41 Pages Posted: 26 Mar 2006
Date Written: September, 2005
This paper examines how the close ties between banks and non-banking firms the so-called "organ bank" relationship in Japanese banking literature declined through bank failures and banking consolidations in pre-war Japan.
With a unique dataset compiled from 1,007 Japanese banks that were doing business between 1926 and 1936, we measure the degree of the "organ bank" relationship by the number of people who worked as directors or auditors for both a bank and a non-banking firm at the same time. Besides this "interlock" number, we also collected data for each bank on their major accounting variables, such as total assets, total deposits, security holdings, return on equity, etc., as well as information such as the time of a failure or a merger or acquisition event.
Applying OLS and Logit models, we found that the number of "interlocking directors" declined in our sample period, when there were many bank failures and bank mergers and acquisitions. Furthermore, the remaining interlocked directors, after the wave of bank failures and consolidations, no longer demonstrated negative effects on the performance of the banks, as measured by their profitability. Our findings suggest, based on experience in Japan, that banking consolidations and selection through failure may help eliminate the detrimental connections between banks and non-banking firms.
A close bank-firm relationship is not unique to pre-war Japan. This paper is the first empirical attempt to see how this relationship changed over time and what mechanisms worked to promote the change.
Keywords: bank, relationship lending, Japan, failure, M&A, banking consolidation
JEL Classification: G21, G34, N25
Suggested Citation: Suggested Citation