The interplay between problem loans and Japanese bank productivity.

Mamatzakis, Emmanuel and matousek, roman and vu, anh (2019): The interplay between problem loans and Japanese bank productivity.

Abstract

This paper examines for the first time the impact of problem loans on Japanese productivity growth. We exploit a new data set of Japanese problem loans classified into two categories: bankrupt and restructured loans. We opt for a novel and flexible productivity growth decomposition that allows to measure the direct impact of these problem loans on productivity growth. The results reveal that Japanese bank productivity growth was severely constrained by bankrupt and restructured loans early in 2000s, whilst some persistence of the negative impact of problem loans on productivity growth is observed in the late 2000s. Thereafter, there is only some partial recovery in the productivity growth from 2012 to 2015. Further, we also perform cluster analysis to examine convergence or divergence across regions and over time. We observe limited convergence, though Regional Banks seem to form clusters in some regions.

• Item Type: MPRA Paper
• Language: English
• Keywords: Bank productivity; Bankrupt loans; Restructured loans; Cluster analysis; Japan
• Subjects: G - Financial Economics > G0 - General; G - Financial Economics > G0 - General > G01 - Financial Crises; G - Financial Economics > G2 - Financial Institutions and Services; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Alam, I. M. S. (2001). A nonparametric approach for assessing productivity dynamics of large US banks. Journal of Money, Credit and Banking, 121-139.

Altunbas, Y., Liu, M.-H., Molyneux, P., & Seth, R. (2000). Efficiency and risk in Japanese banking. Journal of Banking & Finance, 24(10), 1605-1628.

Andrieş, A. M., & Căpraru, B. (2014). The nexus between competition and efficiency: The European banking industries experience. International Business Review, 23(3), 566-579.

Assaf, G. A., Barros, C. P., & Matousek, R. (2011). Productivity and efficiency analysis of Shinkin banks: Evidence from bootstrap and Bayesian approaches. Journal of Banking & Finance, 35(2), 331-342.

Assaf, G. A., Matousek, R., & Tsionas, E. G. (2013). Turkish bank efficiency: Bayesian estimation with undesirable outputs. Journal of Banking & Finance, 37(2), 506-517.

Azad, A. S., Yasushi, S., Fang, V., & Ahsan, A. (2014). Impact of policy changes on the efficiency and returns-to-scale of Japanese financial institutions: An evaluation. Research in International Business and Finance, 32, 159-171.

Barro, R. J., Sala-i-Martin, X., Blanchard, O. J., & Hall, R. E. (1991). Convergence across states and regions. Brookings Papers on Economic Activity, 107-182.

Barros, C. P., Managi, S., & Matousek, R. (2009). Productivity growth and biased technological change: Credit banks in Japan. Journal of International Financial Markets, Institutions and Money, 19(5), 924-936.

Barros, C. P., Managi, S., & Matousek, R. (2012). The technical efficiency of the Japanese banks: non-radial directional performance measurement with undesirable output. Omega, 40(1), 1-8.

Bech, M. L., & Malkhozov, A. (2016). How have central banks implemented negative policy rates? BIS Quarterly Review March.

Berg, S. A., Forsund, F. R., & Jansen, E. S. (1992). Malmquist indices of productivity growth during the deregulation of Norwegian banking, 1980-89. Scandinavian Journal of Economics, S211-S228.

Berger, A. N., & DeYoung, R. (1997). Problem loans and cost efficiency in commercial banks. Journal of Banking & Finance, 21(6), 849-870.

Berger, A. N., & Mester, L. J. (2003). Explaining the dramatic changes in performance of US banks: technological change, deregulation, and dynamic changes in competition. Journal of Financial Intermediation, 12(1), 57-95.

Boucinha, M., Ribeiro, N., & Weyman-Jones, T. (2013). An assessment of Portuguese banks’ efficiency and productivity towards euro area participation. Journal of Productivity Analysis, 39(2), 177-190.

Caballero, R. J., Hoshi, T., & Kashyap, A. K. (2006). Zombie lending and depressed restructuring in Japan. Retrieved from

Casu, B., Ferrari, A., & Zhao, T. (2013). Regulatory reform and productivity change in Indian banking. Review of Economics and Statistics, 95(3), 1066-1077.

Casu, B., & Girardone, C. (2010). Integration and efficiency convergence in EU banking markets. Omega, 38(5), 260-267.

Casu, B., Girardone, C., & Molyneux, P. (2004). Productivity Change in European Banking: A comparison of parametric and non-parametric approaches. Journal of Banking & Finance, 28(10), 2521-2540.

Chaffai, M. E., Dietsch, M., & Lozano-Vivas, A. (2001). Technological and environmental differences in the European banking industries. Journal of Financial Services Research, 19(2-3), 147-162.

Diamond, D. W., & Rajan, R. G. (2000). A theory of bank capital. The Journal of Finance, 55(6), 2431-2465.

Drake, L., & Hall, M. J. (2003). Efficiency in Japanese banking: An empirical analysis. Journal of Banking & Finance, 27(5), 891-917.

Feng, G., & Serletis, A. (2010). A primal Divisia technical change index based on the output distance function. Journal of Econometrics, 159(2), 320-330.

Feng, G., & Zhang, X. (2012). Productivity and efficiency at large and community banks in the US: A Bayesian true random effects stochastic distance frontier analysis. Journal of Banking & Finance, 36(7), 1883-1895.

Feng, G., & Zhang, X. (2014). Returns to scale at large banks in the US: A random coefficient stochastic frontier approach. Journal of Banking & Finance, 39, 135-145.

Fiordelisi, F., & Molyneux, P. (2010). Total factor productivity and shareholder returns in banking. Omega, 38(5), 241-253.

Fu, X. M., Lin, Y. R., & Molyneux, P. (2014). Bank competition and financial stability in Asia Pacific. Journal of Banking & Finance, 38, 64-77.

Fukuyama, H. (1993). Technical and scale efficiency of Japanese commercial banks: a non-parametric approach. Applied Economics, 25(8), 1101-1112.

Fukuyama, H. (1995). Measuring efficiency and productivity growth in Japanese banking: a nonparametric frontier approach. Applied Financial Economics, 5(2), 95-107.

Fukuyama, H. (1996). Returns to scale and efficiency of credit associations in Japan: A nonparametric frontier approach. Japan and the World Economy, 8(3), 259-277.

Fukuyama, H., Guerra, R., & Weber, W. L. (1999). Efficiency and ownership: evidence from Japanese credit cooperatives. Journal of Economics and Business, 51(6), 473-487.

Fukuyama, H., & Weber, W. L. (2002). Estimating output allocative efficiency and productivity change: Application to Japanese banks. European Journal of Operational Research, 137(1), 177-190.

Fukuyama, H., & Weber, W. L. (2005). Estimating output gains by means of Luenberger efficiency measures. European Journal of Operational Research, 164(2), 535-547.

Fukuyama, H., & Weber, W. L. (2008). Japanese banking inefficiency and shadow pricing. Mathematical and Computer Modelling, 48(11), 1854-1867.

Fung, M. K. (2006). Scale economies, X-efficiency, and convergence of productivity among bank holding companies. Journal of Banking & Finance, 30(10), 2857-2874.

Girardin, E., & Moussa, Z. (2011). Quantitative easing works: Lessons from the unique experience in Japan 2001–2006. Journal of International Financial Markets, Institutions and Money, 21(4), 461-495.

Glass, J. C., McKillop, D. G., Quinn, B., & Wilson, J. (2014). Cooperative bank efficiency in Japan: a parametric distance function analysis. The European Journal of Finance, 20(3), 291-317.

Grifell-Tatjé, E., & Lovell, C. K. (1997). The sources of productivity change in Spanish banking. European Journal of Operational Research, 98(2), 364-380.

Heshmati, A., Kumbhakar, S. C., & Sun, K. (2014). Estimation of productivity in Korean electric power plants: A semiparametric smooth coefficient model. Energy Economics, 45, 491-500.

Hoshi, T. (2011). The Hidden Risks in Japan’s Financial System. NIRA Opinion Paper 4(December).

Hoshi, T., & Kashyap, A. (2000). The Japanese Banking Crisis: Where did it come from and how will it end? NBER Macroeconomics Annual 1999, Volume 14 (pp. 129-212): MIT.

Hoshi, T., & Kashyap, A. K. (2010). Will the US bank recapitalization succeed? Eight lessons from Japan. Journal of Financial Economics, 97(3), 398-417.

Hughes, J. P., & Mester, L. J. (2010). Measuring the Performance of Banks: Theory, Practice, Evidence, and Some Policy Implications. In P. M. A.N. Berger, J.O.S. Wilson (Ed.), The oxford handbook of banking (pp. 463-485): Oxford University Press.

Hughes, J. P., & Mester, L. J. (2013). Who said large banks don’t experience scale economies? Evidence from a risk-return-driven cost function. Journal of Financial Intermediation, 22(4), 559-585.

Hughes, J. P., Mester, L. J., & Moon, C.-G. (2001). Are scale economies in banking elusive or illusive?: Evidence obtained by incorporating capital structure and risk-taking into models of bank production. Journal of Banking & Finance, 25(12), 2169-2208. International Monetary Fund. (2012). Japan: Financial Sector Stability Assessment Update.

Kao, C., & Liu, S.-T. (2014). Measuring performance improvement of Taiwanese commercial banks under uncertainty. European Journal of Operational Research, 235(3), 755-764.

Kim, M., & Weiss, J. (1989). Total factor productivity growth in banking: The Israeli banking sector 1979–1982. Journal of Productivity Analysis, 1(2), 139-153.

King, M. (2009). The cost of equity for global banks: a CAPM perspective from 1990 to 2009. BIS Quarterly Review.

Koutsomanoli-Filippaki, A., Margaritis, D., & Staikouras, C. (2009). Efficiency and productivity growth in the banking industry of Central and Eastern Europe. Journal of Banking & Finance, 33(3), 557-567.

Kumbhakar, S. C., Lozano-Vivas, A., Lovell, C. K., & Hasan, I. (2001). The effects of deregulation on the performance of financial institutions: the case of Spanish savings banks. Journal of Money, Credit and Banking, 101-120.

Kumbhakar, S. C., & Sarkar, S. (2003). Deregulation, ownership, and productivity growth in the banking industry: evidence from India. Journal of Money, Credit and Banking, 403-424.

Kumbhakar, S. C., & Tsionas, E. G. (2016). The good, the bad and the technology: Endogeneity in environmental production models. Journal of Econometrics, 190(2), 315-327.

Lincoln, J., & Shimotani, M. (2010). Business Networks in Postwar Japan: Whither the Keiretsu? The Oxford handbook of business groups, 127-156.

Liu, J., & Tone, K. (2008). A multistage method to measure efficiency and its application to Japanese banking industry. Socio-Economic Planning Sciences, 42(2), 75-91.

Lozano-Vivas, A., & Pasiouras, F. (2014). Bank productivity change and off-balance-sheet activities across different levels of economic development. Journal of Financial Services Research, 46(3), 271-294.

Mamatzakis E and M Tsionas (2019) ‘Further Results on Estimating Inefficiency Effects in Stochastic Frontier Models’, with Mike G. Tsionas, European Journal of Operational Research, Volume 275, Issue 3, 16 June, Pages 1157-1164.

Mamatzakis E and F Avalos (2018) ‘Euro area unconventional monetary policy and bank resilience’, , BIS Working Papers, No 754. November.

Mamatzakis E and A. Vu (2018). ‘The interplay between Quantitative Easing, Risk and Competition: The case of Japanese banking,’ Financial Markets, Institutions & Instruments Journal, Vu, Volume 27, Issue1, February, Pages 3-46.

Mamatzakis E and M Tsionas (2017). ‘Adjustment costs in technical efficiency: an application to global banking.’ European Journal of Operational Research, available online 23 June, 256 (2), 640-649.

Mamatzakis E and A Kalyvas (2017) ‘Do Creditor Rights and Information Sharing Affect the Performance of Foreign Banks?’ Journal of International Financial Markets, Institutions & Money, Volume 50, September, Pages 13-35.

Mamatzakis E and M. Psillaki (2017). ‘What drives bank performance in transitions economies? The impact of reforms and regulations’, Research in International Business and Finance, 39, 578-594.

Mamatzakis E and Bermpei (2016). ‘What is the effect of unconventional monetary policy on bank performance?’ with Theodora Bermpei, Journal of International Money and Finance, 67, 239-263.

Mamatzakis, Emmanuel, Matousek, Roman and Vu, Anh Nguyet (2016) What is the impact of problem loans on Japanese bank productivity growth? In: Portsmouth-Fordham Conference on Banking and Finance, 24-25 September 2016, Portsmouth Business School.

Mamatzakis E (2015). Risk and efficiency in the Central and Eastern European banking industry under quantile analysis. Quant Financ 15:553-567.

Mamatzakis E and M Tsionas (2015). ‘How are market preferences shaped? The case of sovereign debt of stressed euro-area countries’, Journal of Banking & Finance 61, 106-116.

Mamatzakis E with MG Tsionas, SC Kumbhakar, A Koutsomanoli-Filippaki (2015). ‘Does labour regulation affect technical and allocative efficiency? Evidence from the banking industry’, 61, Journal of Banking & Finance.

Mamatzakis E, Bermpei T (2014). What drives investment bank performance? The role of risk, liquidity and fees prior to and during the crisis. International Review of Financial Anal 35:102-117.

Mamatzakis E. and Koutsomanoli-Filippaki, Anastasia, (2009). ‘Performance and Merton-type default risk of listed banks in the EU: A panel VAR approach,’ Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2050-2061, November, 2009

E Mamatzakis and MG Tsionas, (2019)Further results on estimating inefficiency effects in stochastic frontier models, European Journal of Operational Research 275 (3), 1157-1164.

A Bagntasarian, E Mamatzakis (2019) Testing for the underlying dynamics of bank capital buffer and performance nexus, Review of Quantitative Finance and Accounting, 1-34.

EC Mamatzakis, AN Vu (2018) The interplay between quantitative easing, risk and competition: The case of Japanese banking, Financial Markets, Institutions & Instruments 27 (1), 3-46.

EG Tsionas, EC Mamatzakis (2017) Adjustment costs in the technical efficiency: An application to global banking European Journal of Operational Research 256 (2), 640-649.

Mamatzakis, E. C. (2003). Public infrastructure and productivity growth in Greek agriculture. Agricultural Economics, 29(2), 169-180.

Matousek, R., Rughoo, A., Sarantis, N., & Assaf, G. A. (2015). Bank performance and convergence during the financial crisis: Evidence from the ‘old’ European Union and Eurozone. Journal of Banking & Finance, 52(0), 208-216.

Montgomery, H., & Shimizutani, S. (2009). The effectiveness of bank recapitalization policies in Japan. Japan and the World Economy, 21(1), 1-25.

Morrison, P. C., & Schwartz, A. (1996). State Infrastructure and Productive Performance. American Economic Review, 86(5), 1095-1111.

Orea, L. (2002). Parametric decomposition of a generalized

Malmquist productivity index. Journal of Productivity Analysis, 18(1), 5-22.

Phillips, P. C., & Sul, D. (2007). Transition modeling and econometric convergence tests. Econometrica, 75(6), 1771-1855.

Quah, D. T. (1996). Empirics for economic growth and convergence. European Economic Review, 40(6), 1353-1375.

Ray, S. C., & Das, A. (2010). Distribution of cost and profit efficiency: Evidence from Indian banking. European Journal of Operational Research, 201(1), 297-307.

Rughoo, A., & Sarantis, N. (2012). Integration in European retail banking: Evidence from savings and lending rates to non-financial corporations. Journal of International Financial Markets, Institutions and Money, 22(5), 1307-1327.

Sealey, C. W., & Lindley, J. T. (1977). Inputs, outputs, and a theory of production and cost at depository financial institutions. The Journal of Finance, 32(4), 1251-1266.

Stiroh, K. J. (2000). How did bank holding companies prosper in the 1990s? Journal of Banking & Finance, 24(11), 1703-1745.

Sun, K., Kumbhakar, S. C., & Tveterås, R. (2015). Productivity and efficiency estimation: A semiparametric stochastic cost frontier approach. European Journal of Operational Research, 245(1), 194-202.

Tadesse, S. (2006). Consolidation, scale economies and technological change in Japanese banking. Journal of International Financial Markets, Institutions and Money, 16(5), 425-445.

Tortosa-Ausina, E., Grifell-Tatjé, E., Armero, C., & Conesa, D. (2008). Sensitivity analysis of efficiency and Malmquist productivity indices: An application to Spanish savings banks. European Journal of Operational Research, 184(3), 1062-1084.

Weill, L. (2013). Bank competition in the EU: How has it evolved? Journal of International Financial Markets, Institutions and Money, 26, 100-112.

Wheelock, D. C., & Wilson, P. W. (1999). Technical progress, inefficiency, and productivity change in US banking, 1984-1993. Journal of Money, Credit, and Banking, 212-234.

Yang, X., & Morita, H. (2013). Efficiency improvement from multiple perspectives: an application to Japanese banking industry. Omega, 41(3), 501-509.