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

Yamori, Nobuyoshi and Harimaya, Kozo (2010): Efficiency in the Japanese trust banking industry: A stochastic distance function approach.

Abstract

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Japanese trust banking industry; Deregulation; Foreign-owned banks; Technical efficiency
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Altunbas, Y., Liu, M-H., Molyneux, P., & Seth, R. (2000) Efficiency and risk in Japanese banking, Journal of Banking and Finance, 24, 1605–1628.

Berger, A., Demsetz, R., & Strahan, P. (1999) The consolidation of the financial services industry: Causes, consequences, and implications for the future, Journal of Banking and Finance, 23, 135–194.

Berger, A., DeYoung, R., Genay, H., & Udell G.F. (2000) Globalization of financial institutions: Evidence from cross-border banking performance, Brookings-Wharton Papers on Financial Service, 3, 23–120.

Chang, C., Hasan, I., & Hunter, W. (1998) Efficiency of multinational banks: An empirical investigation, Applied Financial Economics, 8, 689–696.

Cornes, T. (1992) Duality and Modern Economics, Cambridge University Press, Cambridge, UK.

Cuesta, R.A., & Orea, L. (2002) Mergers and technical efficiency in Spanish savings banks: A stochastic distance function approach, Journal of Banking and Finance, 26, 2231–2247.

DeYoung, R., & Nolle, D. (1996) Foreign-owned banks in the United States: Earning market share or buying it, Journal of Money, Credit, and Banking, 28, 622–636.

Drake, L., & Hall, M.J.B. (2003) Efficiency in Japanese Banking: An empirical analysis, Journal of Banking and Finance, 27, 891–917.

Elyasiani, E., & Rezvanian, R. (2002) A comparative multiproduct cost study of foreign-owned and domestic-owned U.S. banks, Applied Financial Economics, 12, 271-284.

English, M., Grosskopf, S., Hayes, K., & Yaisawarng, S. (1993) Output allocative and technical efficiency of banks, Journal of Banking and Finance, 17, 349–366.

Fare, R., Grosskopf, S., Lovell, C.A.K., & Yaisawarng, S. (1993) Derivation of shadow prices for undesirable outputs: A distance function approach, Review of Economics and Statistics, 75, 374–380.

Fare, R., & Primont, D. (1995) Multi-output Production and Duality: Theory and Applications, Kluwer Academic Publishers, Boston.

Fukuyama, H. (1993) Technical and scale efficiency in Japanese commercial banks: A non-parametric approach, Applied Economics, 25, 1101–1112.

Fukuyama, H. (1995) Measuring efficiency and productivity growth in Japanese banking: A non-parametric frontier approach, Applied Financial Economics, 5, 95–107.

Grosskopf, S., Hayes, K., Taylor, L., & Weber, W. (1997) Budget-constrained frontier measures of fiscal equality and efficiency in schooling, Review of Economics and Statistics, 3, 116–124.

Hasan, I., & Hunter, W.C. (1996) Efficiency of Japanese multinational banks in the United States, Research in Finance, 14, 157–173.

Jondrow, J., Lovell, C.A.K., Materov, I. S., & Schmidt, P. (1982) On the estimation of technical inefficiency in the stochastic frontier function model, Journal of Econometrics, 19, 233–238.

Kasuya, M. (1986) Economies of scope: Theory and application to banking, BOJ Monetary and Economic Studies, 4, 59–104.

Mahajan, A., Rangan, N., & Zardkoohi, A. (1996) Cost structures in multinational and domestic banking, Journal of Banking and Finance, 20, 283–306.

Marsh, T.L., Featherstone, A.M., & Garrett, T.A. (2003) “Input inefficiency in commercial banks: A normalized quadratic input distance approach”, Working papers, Federal Reserve Bank of St. Louis .

McKillop, D.G., Glass J.C., & Morikawa, Y. (1996) The composite cost function and efficiency in giant Japanese banks, Journal of Banking and Finance, 20, 1651–1671.

Miller, S., & Parkhe, A. (2002) Is there a liability of foreignness in global banking? An empirical test of banks’ x-efficiency, Strategic Management Journal, 23, 55–76.

Solomon, T. (2006) Consolidation, scale economies and technological change in Japanese banking, Journal of International Financial Markets, Institutions and Money, 16, 425–445.

Sturm, J-E., & Williams, B. (2004) Foreign bank entry, deregulation and bank efficiency: Lessons from the Australian experience, Journal of Banking and Finance, 28, 1775–1799.

Tachibanaki, T., Mitsui, K., & Kitagawa, H. (1991) Economies of scope and shareholding of banks in Japan, Journal of the Japanese and International Economics, 5, 261–281.

Yoshioka K., & Nakajima, T. (1987) Economies of scale in Japan’s banking industry, Bank of Japan Monetary and Economic Studies, 5, 35–70.