ESRI Discussion Paper Series No.105
END OF THE CONVOY SYSTEM
AND THE SURGE OF
MARKET D ISCIPLINE:
EVIDENCE FROM JAPANESE SMALL FINANCIAL INSTITUTIONS
by
Keiko Murata, Masahiro Hori
May 2004
Economic and Social Research Institute
Cabinet Office
Tokyo, Japan
END OF THE CONVOY SYSTEM
AND THE SURGE OF
MARKET D ISCIPLINE:
EVIDENCE FROM JAPANESE SMALL FINANCIAL INSTITUTIONS*
by
Keiko Murata †
(Economic and Social Research Institute, Cabinet Office)
And
Masahiro Hori‡
(Cabinet Office)
May 2004
∗
We would like to thank Kotaro Tsuru and other ESRI seminar participants for their helpful comments. The views
expressed in this paper are those of authors’ and do not necessarily represent those of the ESRI, or of the Japanese
government.
†
Keiko Murata, [email protected].
‡ Masahiro Hori, [email protected].
Abstract
This paper tests for the presence of market discipline by examining the effects of deposit-taking
institutions’ risk on the growth of deposits. The study analyzes a large panel of 689 small
deposit-taking institutions (shinkin banks and credit cooperatives) in Japan during the period from
FY 1992 to FY 2002. This study on Japanese institutions, which experienced financial crises and
shifts in regulatory schemes in the 1990s, allows us to evaluate the interaction between market
discipline and regulatory schemes and the impacts of the banking crises on the discipline. Our
empirical findings support the effective role of market discipline by depositors. Riskier institutions
attract smaller amounts of deposits. Depositor sensitivity to bank risk changed over time, complying
with the historical development of regulatory schemes and the deposit insurance system.
Disciplinary behavior of small-account depositors, who are fully insured, suggests that depositors are
unwilling to bear certain non-pecuniary costs that accompany bank failures.
Key words: governance, market discipline, deposit insurance, small financial institution
JEL Classification: G21,G32
1. Introduction
The banking crises around the world over the past two decades have revived the public’s
concerns over soundness of the financial system. The simple policy recommendation for the problem
is to tighten supervision and prudential regulation on deposit-taking institutions to check their
excessive risk taking. Tighter regulation that restricts business activities may, however, cause welfare
losses. Alternatively, rather than depending solely on government supervision and regulations, one
modern view holds that regulators may more efficiently control the risk-taking behaviors of banks by
subjecting them to increased market discipline, defined as the discipline imposed by depositors on
bank managers. Depositor discipline on banking organizations has recently attracted significant
attention by researchers and policy-makers alike.1
Most earlier studies on market discipline focused on U.S. experiences, and generally find
support for the presence of some market discipline by bank creditors (see the survey by Flannery
(1998) and Demirgüç-Kunt and Kane (2002)). Martinez, Peria, and Schmukler (2001), who
investigated the experiences of Argentina, Chile, and Mexico during several banking crises, also
confirm market discipline. Demirgüç-Kunt and Huizinga (2003) and Hosono et. al. (2004) examined
a larger dataset of cross-country bank level observations over several years to show that many
countries around the world retain some degree of market discipline, though the level of that
discipline depends on bank regulations, the extent to which the financial system is developed, and
deposit insurance.
This paper empirically investigates some issues surrounding market discipline by focusing
on Japanese experiences in the 1990s. Despite its practical importance for Japanese policy-makers,
only a few empirical studies on market discipline by Japanese depositors have been done. Hosono
(2003) examined Japanese bank-level data for the period of FY1991-FY2001, and found a negative
correlation between deposit growth and bank risks. Tsuru (2003) evaluated the effects of a change in
the deposit insurance scheme and found that market discipline became more effective ahead of the
partial lift of the blanket guarantee of deposits (April 2002). This paper complements them by
examining panel data of smaller Japanese financial institutions, namely, shinkin banks and credit
cooperatives, from FY1992 to FY2002.
A study of Japanese financial institutions of this period should help to identify the working
of market discipline on bank governance for the following reasons. First, our choice of sample
includes the period of breakdown of the so-called “convoy” style banking supervision and regulation.
This regime change means the authorities must establish a clearly defined new regulatory framework
1
For example, the Basel Committee on Banking Supervision has recognized that market discipline becomes
increasingly important in contemporary dynamic and complex financial systems; it complements the government’s
regulation and supervision. This recognition is incorporated in Pillar 3 of the new accord. See the Basel Committee
1
based on market discipline. Second, the sample includes the period of banking crisis, which may
affect depositor responsiveness to risk. Third, partly due to the crisis, the deposit insurance scheme
was explicitly reestablished and modified several times over the period. In view of these policy
changes and the prolonged crisis that occurred, Japanese experiences offer us a good opportunity to
test the presence of market discipline and how the changes in regulatory schemes affected the
effectiveness of the discipline.
Our focus on small deposit-taking institutions, i.e., shinkin banks and credit cooperatives2,
also makes this paper unique. Although the small institutions occupy only 20 percent of Japan’s total
outstanding deposits, they cover nearly 80 percent of total private deposit-taking institutions in Japan,
making our data set much larger than that of earlier studies of Japanese banks (Table 2). We exclude
larger banks such as city banks and regional banks from our data set, since the study on the small
institutions by itself is interesting and noteworthy. First, by restricting our sample to small
institutions, whose depositors are mostly individuals or small and medium enterprises (SMEs), we
can observe the reaction of such depositors that are supposed not to have expertise in evaluating the
risk of bank failures.3 Second, since their deposits generally add up to small amounts, i.e., less than
the maximum insurance payments per depositor (¥ 10 million + interest, etc.), the ratio of deposits
fully protected by the deposit insurance scheme is presumed to be high.4 This means that depositors
of those institutions may respond neither to the risk of bank failures nor to the change in deposit
insurance scheme. On the other hand, if they respond to the risk irrespective of the facts above, it
suggests financial literacy of small-account depositors and the importance of restitution costs, since
depositors select financial institutions to avoid the non-pecuniary costs that accompany a failure of
financial institutions.
The remainder of this paper is organized as follows. Section 2 describes the developments
in the financial regulatory frameworks in Japan. Section 3 explains our data and empirical
methodology. Section 4 discusses our empirical findings on market discipline and evaluates how the
changes in the regulatory frameworks, including the deposit insurance scheme, affected market
on Banking Supervision (2003).
2
Shinkin banks and credit cooperatives are relatively small deposit-taking institutions established to facilitate smooth
financing for small and medium-sized business and individuals, and are not corporations but non-profit organizations
in a membership structure. The core business of those institutions is the acceptance of deposits from their members
and non-members alike and then to extend these funds as credit, and to provide foreign exchange transactions to
members. They also provide a wide range of secondary businesses, such as securities investments and sales of
government and public bonds. Their operations have become increasingly similar to those provided by banks but are
focused on local communities (see Table 1 for a comparison with ordinary banks).
3
Small and medium enterprises and individuals generally cannot afford the search costs to find a good bank in
comparison with large firms and financial experts.
4 The ratio of deposits that amounted less than ¥ 10 million (per depositor) was 38 percent of total outstanding
deposits in city banks, while 68 percent of those in shinkin banks in March 2000. This ratio is not available for credit
cooperatives, but is naturally expected to be even higher.
2
discipline. Section 5 concludes.
2. Financial Regulatory Frameworks and Deposit Insurance in Japan
2.1 Collapse of the Traditional “Convoy System”
Traditionally, the regulatory and supervisory authorities alone played the bank-disciplining
role in Japan. The banking policy—the so-called the “convoy system”—had fully protected deposits
on an informal basis. The most important safety net in the framework was implicit blanket protection
of deposits through public confidence in the ability of the authorities to avoid major financial
instability. In the event of bank failures, the authorities had extended emergency liquidity assistance
to troubled banks and had provided financial resources to encourage healthy institutions to merge
troubled institutions.
The asset deflation and banking crises in the 1990s5, however, revealed the bank discipline
by regulatory and supervisory authorities to be far from perfect. Banks that suffered from
deterioration in balance sheets tend to embark on undesirable paths, investing in high-risk assets to
recover their losses while counting on government’s bailouts. At the same time, substantial depletion
even for relatively strong banks makes it increasingly difficult to persuade healthier banks to
participate in bailout operations for other troubled banks. Essentially, the Japanese convoy system
became obsolete in coping with the market pressure that led to the financial crises of late 1990s6. As
the chronology in Table 3 shows, bank failures, which were exceptional in Japan until the early
1990s, became usual after the failures of two large credit cooperatives in 1994 beyond the control of
the authorities7.
2.2 Market Discipline by Depositors
The breakdown of the convoy system—a true regime change—meant that the authorities
5
Japan’s financial crisis was unprecedented in terms of its severity. According to Hosono (2003), the Japanese
government spent some 37 trillion yen (about US$326 billion) for recapitalization of banks and deposit protection
from 1992 to 2003; Japanese banks are still poorly capitalized; they are burdened with non-performing loans of 39.2
trillion yen (376 billion dollars) or 8.6 percent of the total outstanding loans as of September 2002.
6
Boot and Thakor [1993] argued theoretically that the regulatory authorities, who are responsible for both ex ante
and ex post monitoring, may have incentives to overlook misconducts by banks and to adopt “forbearance policies”
to protect their own reputations.
7
Table 2(B) reports the number of insured deposit-taking institutions in Japan on a historical basis. Although the
total number has been decreasing since the 1970s, the annual rate of decrease until 1993, i.e., -0.76 percent, was
mostly due to mergers and acquisitions. After 1994, the rate shoots down to -4.2 percent because of the sharp increase
of bank failures during the financial crises.
3
must establish a new regulatory framework. After the breakdown, hopes for the disciplinary function
of depositors mounted in Japan. Depositors (as a type of creditor) are not entitled to any special
benefits, even if a bank’s high-risk investment succeeds, while they will suffer some portion of the
losses in case of failures. Therefore, depositors have strong incentives to curb banks’ risk-taking
activities. Although regulatory authorities monitor banks to represent the interests of small-account
depositors, who are not experts in bank monitoring, depositors’ option to shift their deposits from
risky banks to safer banks (“bank selection”) may be able to perform a disciplinary role by means of
“exit” as defined by Hirschman (1970).
Following the announcement of Japan’s “Big Bang” reform in 1996 to phase in open
competition, Japanese authorities took a sequence of actions to establish a new framework that
emphasizes the disciplinary function of depositors. Those actions included: strict enforcement of
bank capital standards, enhancement of public disclosure, use of prompt corrective action, closing of
inferior banks, a move toward a limited deposit insurance system, and other schemes that utilize
market forces. Since the success of the new framework rests on the presence of depositor discipline,
empirical verification of the discipline is essential to Japanese policy design.
2.3 Development of a Deposit Insurance System
The end of the convoy system also highlighted the importance of deposit insurance.
Though Japanese deposit insurance was established in 1971, it remained nonfunctional until 1992.
As the banking problems became apparent to the public in the mid-1990s, the Japanese government
declared in 1995 an introduction of a blanket guarantee that protected unlimited amount of deposits
as an emergency measure.
Though the blanket guarantee was initially scheduled for March 2001, the lift of the
emergency measures was postponed in 1999 until March 2002. In April 2002, the authorities
reintroduced the ¥10 million maximum insurance payments for time deposits; on the other hand, it
decided to continue unlimited protection for demand deposits until March 2005. Finally, in
December 2002, the authorities decided to introduce “payment and settlement deposits,” which are
redeemable on demand and bear no interest, to be fully and permanently protected after April 2005.
These bustling changes in the deposit insurance may be undesirable in terms of policy transparency,
but they offer us a rich opportunity to examine how the changes in the design of deposit insurance
affect depositor disciplinary behavior.
3. Data and Methodology
4
3.1 Data
Our main data source is Financial Statements of Shinkin Banks in Japan and Financial
Statements of Credit Cooperatives in Japan, both of which are edited and published annually by
Financial Book Consultants, Ltd. (Kinyu tosho konsarutanto sha). We use unbalanced panel data
from March 1992 to March 2003. The sample covers the period when the collapse of asset bubbles
put Japan’s banking system on very shaky ground. Japan’s financial system was reformed from its
convoy style to a market-based self-responsibility style. Moreover, the Basel capital standards were
enforced, and the deposit insurance scheme was amended a number of times.
To improve the reliability of our analyses, we made the following cuts. First, we delete
bank observations that failed less than two years after their statements of accounts. Second, if an
institution was involved in a merger with another bank, or acquired the business of a failed
institution, we excluded it from our sample for that year. For credit cooperatives, we observed
regional ones only, since other types of credit cooperatives may have their own behavioral principles
other than economic ones8. These selections leave us with a sample of 648 institutions (418 shinkin
banks and 230 credit cooperatives) in 1992 to 410 (297 and 113) in 2002. Total bank-year sample
consists of roughly 5,500, the largest data set on deposit-taking institutions ever studied in Japan.
3.2 Variables and Regression Model
To examine depositor behavior, we look at the effect of characteristics of deposit-taking
institutions on deposit growth9. Although small-account depositors may be incapable of effective
monitoring due to the free-rider problem, they have the option to shift deposits from risky banks to
safer banks if they perceive possible bank failures. Thus, the variables that reflect the risk of the
failure of each institution are assumed to have negative effects on deposit growth. In the basic model
of our regression analyses below, we use the annual growth of total deposits for each institution as
our dependent variable.
∆ ln Depositsi = α + β Bank fundamentals i + e i .
(1)
As bank fundamentals, we test five variables that probably have some connections with the
8
There are four types of credit cooperatives in Japan: regional, occupational, industrial and Korean national.
Many of earlier studies of market discipline focused not only on deposit growth but also on deposit interest rates
(measured as interest expenses divided by interest paying debt). However, we examine only the former, since we
believe the latter (derived interest rates) is an imprecise measure of the cost of funds for banks, especially when the
deposit outstanding for each bank is changing sizably over a year.
9
5
risk of bank failures. The first variable is a capital-asset ratio, which is defined as the ratio of own
capital to total assets. The capital-asset ratio represents the bank’s asset risks, and it occupies the
interest of the general public in Japan as an indicator of bank health, especially after the introduction
of the Basel capital standard in March 199310. If depositors are very much concerned about bank
risks and are exerting a disciplinary function, we can expect a positive correlation between the
capital ratio and deposit growth.
The second explanatory variable is the share of real-estate-related loans defined as the
ratio of real-estate-related loans to total outstanding loans. As Japan’s banking problems emerged
after the burst of the asset bubble, loans to real-estate related industries that were not profitable for
more than ten years are a synonym for low-quality credit in Japan. Risk-conscious depositors would
prefer to keep their bank account in the institutions with smaller real-estate loans. Therefore, we
expect the real-estate share variable to have a negative impact on deposit growth.
The third explanatory variable is an indicator of banks’ liquidity risks, which is defined as
the ratio of cash, deposits (to other banks) and government bonds to total assets. Banks with large
liquid assets are perceived to be safer, since these assets would allow a bank to meet unexpected
withdrawals. We expect this variable to have a positive effect on deposit growth. The fourth
explanatory variable is bank profitability, which is measured by the ratio of operational profits to
total assets. After controlling for the balance sheet conditions such as the capital ratio and the
real-estate share, we expect this profitability variable to have a positive influence on deposit growth.
The last variable is a proxy for bank size. At least up until the failure of the Hokkaido
Takushoku Bank in November 1997, the Japanese public believed the government would stick to the
“too-big-to-fail” commitment. In consideration of the forbearance policy (especially for larger
banks) by the government, depositors may prefer to have their accounts in larger institutions. We use
the logarithm of total assets as the size proxy. We expect a positive correlation between the bank size
proxy and deposit growth for risk-conscious depositors.
The summary statistics of our data can be seen in Table 4. The first four rows of the table
give us scale information for the institutions (billions of yen), and the lower rows summarize the
statistics for the variables included in our regression analyses below.
4. Empirical Results
4.1 The Effect of Bank Risk Characteristics on Deposit Growth
10
Though shinkin banks and credit cooperatives are domestic banks that are exempt from the Basel accord, the MOF
introduced 4 percent capital standards for domestically oriented deposit-taking institutions in 1986.
6
Table 5 presents results of our cross-section regressions for each year from FY 1992 to FY
2001 (March 1993-March 2002). The sample consists of shinkin banks and credit cooperatives; the
table reports the results for the total sample (shinkin banks & credit cooperatives), shinkin sample,
and credit cooperative sample respectively. Since the results for each bank type are not very different,
we illustrate the results for the total sample in our main text.
4.1.1 Cross-section Regressions for Each Year
Signs of the estimated coefficients are generally consistent with our expectations for
disciplined depositors, i.e., positive on the capital asset ratio, negative on the real-estate-related loan
share, positive on the liquid asset ratio, positive on the profit ratio, and positive on the bank size
proxy; a comparison among fiscal years makes the working of market discipline much clearer.
Although the coefficients on the capital-asset ratio are all positive throughout the years
examined—indicating depositor concern for the ratio—those are relatively small and statistically
insignificant up until FY 1995. It turns significant in FY 1996 for the first time, and increased in size
after FY 1997 (March 1998), directly after the systemic banking crisis in 1997-98. One natural
interpretation of this transition is that depositors became capital conscious through the introduction
of Basel capital standard and the experience of the banking crisis.
The results on the share of real-estate-related loans are a bit mixed. Estimated coefficients
for earlier years are positive, contrary to our expectations. However, they turn to negative after FY
1998 and become significant toward the end. The idea that the share of real-estate-related loans
reflects the quality of an institution’s assets is relatively new. Changes in the real-estate share
coefficients seem to suggest that depositors were not concerned with the real-estate share until
recently; however, they began to take interest in that share through the lasting asset price deflation
that eroded the collateral value of bank loans throughout the 1990s. The coefficients on the ratio of
liquid assets to total assets often turn negative inconsistently with our expectation, though they are
not statistically significant.
Estimated coefficients on bank profitability are all positive throughout years, and the
majority of them are statistically significant. This seems to suggest that Japanese depositors had a
marginal sense to prefer profitable banks even before the collapse of the traditional convoy system.
The transition pattern of the bank size coefficients also rouses our interest. Significantly
positive coefficients until FY 1996 indicate that Japanese depositors preferred to put their money in
larger institutions, irrespective of the fact that the too-big-to-fail policy does not apply to shinkin
banks and credit cooperatives. However, the love for larger banks has been relinquished (the
coefficients turn to small and insignificant) in FY 1997, when the failures of Yamaichi Securities and
Hokkaido Takushoku Bank signified the end of the too-big-to-fail policy.
7
4.1.2 Panel Regressions
Although the results above are quite suggestive of the working of market discipline, the
results of the cross-section regression may be biased due to some unobserved individual effects.
Here, we report the results of panel regressions (within estimates11) for the period from FY1992 to
FY2001 that take account of the possible idiosyncrasies of each institution. Equation (1) is now
replaced with the following:
∆ ln Depositsi,t = µ i + d t + β Bank fundamentals i,t -1 + e i,t .
(2)
where dt represents time specific effects and µi individual or fixed effects.
The first column of Table 6 shows that the depositor discipline observed in our
cross-section analyses is generally verifiable by a panel regression. Although the bank size
coefficient turns to negative, contradicting our reliance on the too-big-to-fail policy, the coefficients
on the capital asset ratio and profitability are still significantly positive, indicating the disciplinary
behavior of Japanese small-account depositors.
To take account of the changes in the behavioral characteristics of depositors, we tried
several dummy variables that allow for parameter shifts over the years. Based on the results of
F-tests to detect the timings of parameter shifts, we select FY1995 (March 1996) and FY1999
(March 2000) as our points of structural change examinations. The second column of the Table 6
reports the result with those structural change dummies.12 The signs and statistical significances of
the coefficients on the five basic explanatory variables are not largely affected even after the
inclusion of dummy variables, except for the coefficient on the capital-asset ratio, which becomes
statistically indifferent from zero.
On the other hand, coefficients on newly added variables all indicate that the depositors’
response to the bank risk characteristics changed to enhance their disciplinary role at the selected
timings of structural changes. For instance, the coefficients on the capital-asset ratio significantly
increased both at FY1995 and at FY1999, indicating that depositors got concerned about the ratio
when they choose banks to deposit their precious nest egg. Although FY1995 is one year earlier than
the timing of the capital ratio parameter shift observed in the cross-section regressions in Table 5,
relatively large deposit-taking institutions, such as Hyogo Bank and Kizu Credit Cooperative,13
11
The choice of our model depends on the results of the Hausman test for each equation.
We left the dummy variables only when they were statistically significant.
13
Kizu Credit Cooperative was the second-largest credit cooperative in FY1994, as measured by total outstanding
assets.
12
8
failed in FY1995, the year that the use the jargon “pay-off”—which started to appear after FY
1994—surged in articles of major Japanese newspapers (see Table 7). The failures possibly worked
as a “wake-up call” for depositors, as proposed by Martinez, Peria, and Schmukler (2001). The
second point of parameter shift, i.e., March 2000 (FY 1999), is the month one year before the
scheduled closing day of the blanket guarantee (the closing day was postponed by one year to March
2002 in the end, however). Appearance of the phrases “pay-off” and “capital ratio” in Japanese
major newspapers reached a peak in that year (FY1999). Reflecting these concerns about the
soundness of banks, Japanese small-account depositors intensified their preferences for institutions
with higher net worth.
Coefficients on other variables also shifted significantly toward the direction of more
disciplinary depositors. The positive coefficient on the share of real-estate-related loans decreased in
FY1999, reflecting the recent rise in depositor precautions against banks with heavy
real-estate-related loans. The coefficient on the profitability sharply increased in FY1999, indicating
depositors’ preference for more-profitable banks. The coefficient on the bank size proxy, i.e., the
logarithm of institution’s total assets, slightly but significantly increased in both FY1995 and
FY1999.
The cross-section and panel regressions shown above are all in reduced forms with lagged
explanatory variables. Before closing this subsection, we would like to present the results of a
structural regression that includes nominal interest rate as an additional explanatory variable14.
Column (3) of Table 6 reports the result. Inclusion of the new variable does not noticeably change
the signs and significance of the coefficients examined above. The coefficient on the newly included
interest rate is positive and statistically significant, showing that small-account depositors in our
sample normally conform to the rule of market economy.
In summary, findings of our regression analyses on Japanese small financial institutions
indicate that small-account depositors are disciplined by nature and that their discipline is polished
in confrontation with the environments in which depositors assume self-responsibility.
4.2 Deposit Insurance and Market Discipline
This section examines the effects of deposit insurance on market discipline. Here, we
present evidence that proves close ties between depositor behavior and the design of the deposit
insurance system.
14
Since the deposit interest rate for each institution is not available, the proxy is calculated by utilizing the interest
payment and composition of deposits.
9
4.2.1 The Effect of the Partial Lift of the Freeze on the Payoff System
In spring 2002, a number of measures to protect the full amount of deposits in Japan were
finally terminated. Although the full protection for demand deposits (current deposits, ordinary
deposits, and specified deposits precisely) was extended at least until March 2003, that for time
deposits was abolished and their insured amount was set, up to a maximum principal of ¥10 million
per depositor per financial institution, plus interest (limited coverage). It is a well-known fact in
Japan that this institutional change caused a considerable shift of money from time deposits to
demand deposits (see Figure 1). What we are interested in is the relation of this defensive reaction of
depositors and the characteristics of banks in which depositors put their money. Our guess is that the
incentive to shift their money from time deposits to demand deposits is weak for healthy bank
depositors (or strong for unhealthy bank depositors) if depositors distinguish a good bank from a bad
one.
To examine that inference, we ran a few regressions of the following unique specification:
∆
Demand Depositsi,t
Total Depositsi,t
= f i + d t + β Bank fundamentals i,t -1 + e i,t .
(3)
Explained variable is the annual change of the ratio of demand deposits to total deposits for each
institution. The advantage of this formulation is that it allows us to extract this policy effect
exclusively of other factors. As our independent variables, we use the same five variables as the
regression (2), i.e., the capital-asset ratio, the share of real-estate-related loans, the liquidity of assets,
bank profitability, and bank size proxy. The first column of Table 8 reports the result of a panel
regression (within estimates) on the data from FY1992 to FY2000, one year before the institutional
change that we want to examine. The liquidity of assets and the bank size term had a positive
correlation on the demand deposit ratio change over the period. The coefficients on other variables
are not different from zero.
The regression result (column (2)) that includes FY 2001 data shows much stronger
correlation between the change in demand deposit ratio and bank characteristic variables. R-squared
rises substantially. The capital-asset ratio has a negative effect, indicating that depositors of banks
with low capital ratios shifted their money to fully protected demand deposits more earnestly.15 The
coefficient on the real-estate-related loan share is significantly positive, suggesting depositor concern
15
If this policy change affects depositor behavior, there should be either a shift from time deposits to demand
deposits in risky banks or a shift of time deposits from risky banks to safer banks. Both shifts can be tested by a
change in parameter β in equation (3).
10
for the soundness of banks with excessive real-estate loans. A negative coefficient on the
profitability term is also in line with our inference that the change in demand deposit ratio should
have some correlation with the bank characteristics.
Since the inclusion of FY2001 observations changes the statistical significance of
estimated coefficients drastically, we tried dummy variables to account for a possible parameter shift
in our regression (see column (3)). The estimated coefficients on the FY2001 dummies are very large
and statistically significant for all five variables. The findings from our demand deposit ratio
regressions eloquently demonstrate that the rush to demand deposits observed in spring 2002 was led
by the behavior of unhealthy bank depositors.
4.2.2 The Effect of the Postponement of the Payoff Reintroduction
As our second illustration of the relation between depositor behavior and the deposit
insurance system, we take an example of change in the schedule of payoff reintroduction. Although
the payoff scheme was reintroduced for time deposits in April 2002, unlimited protection for demand
deposits, i.e., current deposits, ordinary deposits, and specified deposits, was extended initially until
March 2003, and finally until March 2005. Furthermore, in December 2002 the government
announced the introduction of a permanent measure to fully protect newly defined “payment and
settlement deposits,”16 which will be enforced from the beginning of April 2005.
To examine the effect of the postponement of payoff reintroduction and the introduction of
newly defined deposits with full protection, both announced in FY2002, we extend our panel data
for an extra year and regress Equation (2), including dummy variables to allow for parameter shifts
in FY2002. The negative interaction term of capital-asset ratio and FY2002 dummy (as reported in
the first column of Table 9) suggests that the sensitivity of depositors to bank risk becomes lower in
FY2002. Our result and previous Japanese studies, i.e., Hosono (2003) and Tsuru (2003), agree on
the point that the depositors’ discipline depends on the design of the deposit insurance scheme. And
the result here demonstrates further that the finding holds even for small-account depositors who go
into the ¥10 million maximum insurance payments.
5. Conclusion
This paper empirically investigates the issues of market discipline by examining Japanese
small deposit-taking institutions in the 1990s. We are here concerned with two questions that are
16
The payment and settlement deposits must satisfy three conditions to be fully protected: bearing no interest;
deposit redeemable on demand; and providing normally required payment and settlement services.
11
relevant to the design of a new regulatory framework for Japanese banking, namely: 1) whether
market discipline has effectively worked since the early 1990s in Japan, and 2) whether changes in
the regulatory frameworks, including the deposit insurance scheme, affect the extent of market
discipline. Though the previous studies found that Japanese depositors discriminate across banks on
the basis of the risk of bank failure, the evidence may not be applied to depositors of smaller
financial institutions, such as shinkin banks and credit cooperatives, since they are not well informed
of bank risks and the majority of them are snugly wrapped in the (limited) deposit insurance.
The results obtained in this paper show that deposit growth is negatively correlated with
the risk of financial institutions. The relative importance of market discipline rises both in FY1995
and FY1999. The first shift is associated with the failures of relatively large financial institutions.
The second shift in FY1999 suggests that depositors acted on that timing in anticipation of the
reintroduction of a “pay-off” scheme, which was planned to be enforced one year later.
Our results also show that the extent of market discipline is clearly affected by changes in
regulatory frameworks, especially those of deposit insurance. The fact that the presence of market
discipline is confirmed even for the small-account depositors may suggest their financial literacy and
the importance of restitution costs. It is, therefore, important for policy-makers to understand the
implications of these empirical findings and to design financial safety nets so as to make the best use
of the market discipline by all kinds of depositors.
12
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Demirgüç-Kunt, Asli and Edward J. Kane (2002), “Deposit Insurance Around the Globe: Where
Does It Work?” Journal of Economic Perspectives, Vol. 16, No.2, 2002, pp. 175-95.
Demirgüç-Kunt, Asli and Harry Huizinga (2004), “Market Discipline and Deposit Insurance,”
Journal of Monetary Economics, Vol. 51, 2004, pp. 375-399.
Flannery, Mark J. (1996), “Using Market Information in Prudential Bank Supervision: A Review of
the U.S. Empirical Evidence,” Journal of Money, Credit and Banking, Vol. 30, NO.3, 1996,
pp.273-304.
Hirschman, Albert O. (1970), Exit, Voice and Royalty: Response to Decline in Firms, Organizations,
and States, Harvard University Press.
Hosono, Kaoru (2003), “Depositors’ Discipline During the Banking Crisis in Japan,” 2003, mimeo.
Hosono, Kaoru, Hiroko Iwaki, and Kotaro Tsuru (2004), “Bank Regulation and Market Discipline
around the World”, 2004, mimeo.
Martinez Peria, Maria Soledad, and Sergio L. Schmukler (2001), “ Do Depositors Punish Banks for
Bad Behavior? Market Discipline, Deposit Insurance, and Banking Crises,” Journal of
Finance, Vol. 56, No.3, 2001, pp.1029-51.
Tsuru, Kotaro (2003), “Depositors’ Selection of Banks and the Deposit Insurance System in Japan:
Empirical Evidence and its Policy Implications,” RIETI Discussion Paper Series 03-E-24,
2003.
13
Table 1 A Comparison: Shinkin Banks and Credit Cooperatives vs. Banks
Shinkin Banks and Credit Cooperatives
To facilitate smooth financing for small and mediumsized businesses and individuals in a specified location.
A nonprofit, cooperative association with members. In
Structure
principle, operates on the basis of one vote per member.
The focus is on generating benefits for members and local
Geographical location Restricted to a geographical area; the development of
of business and
branches has occurred to maximize effectiveness within
branches
the region.
Purpose
Customers
Area of business
Regulator
# of institutions
as of March 2002
Depostis per institutions
as of March 2002
Share of deposits by
individuals as of March 2001
Banks
Provision of financial services to a range of corporate
entities and individuals without restriction on location
A stock company with the business focused on generating
profits for the stock holders.
In principle, no restriction on geographical location and
branches are established to enhance efficiency. In general,
the location of branches is focused on major cities.
Companies (subject to certain size restrictions) and
individuals who live or work with the specified region. In
principle, lending is restricted to members but loans may
be approved to non-members within certain fixed criteria.
Deposits, loans, foreign exchange and related
Financial Supervisory Agency (Prefectures for Credit
Cooperatives until March 2000).
Companies and individuals in general with focus on larger
corporations and financially strong institutions. There is
no restriction on who can place deposits.
596 (Shinkin 349, Credit Cooperative 247)
164
¥199 billion (Shinkin ¥292, Credit Cooperative ¥67)
¥2,915 billion
76.3% (Shinkin 76.3%, Credit Cooperative 79.5%)
62.3%
Deposits, loans, foreign exchange and related
Financial Supervisory Agency.
Note: Deposits obtained by individuals in credit cooperatives are from "Nikkin Shiryo Nenpo," published by the Japan Financial News Co., Ltd.
Table 2 Position of Shinkin Banks and Credit Cooperatives in the Deposit Taking Institutions in Japan
(A)
Fiscal
Year
(ending:
March,31)
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
(B)
Fiscal
Year
(ending:
March,31)
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Insured Deposits by Sector of Financial Institutions
(Unit:
Banks
City
Banks
361,564
405,036
421,730
417,523
418,975
424,776
434,071
428,676
428,207
432,488
446,812
448,927
479,229
478,098
493,257
158,960
180,209
184,900
175,188
169,169
169,657
172,414
170,717
168,766
172,244
178,508
181,490
193,101
200,167
216,244
Regional Regional
Banks
Banks II
107,207
120,168
125,264
129,149
133,250
137,051
142,631
144,615
147,132
150,615
154,772
160,422
174,360
173,501
176,510
44,179
47,904
50,723
51,682
52,708
53,880
55,795
55,864
55,818
55,549
58,991
53,933
55,918
55,326
52,709
Trust
Banks
46,064
50,384
55,185
57,126
59,379
59,842
58,629
52,825
51,924
49,483
49,445
48,496
48,794
45,994
43,588
Long-term Shinkin
Credit
Banks
Banks
5,154
62,575
6,369
70,973
5,658
76,735
4,378
79,876
4,469
82,933
4,347
85,735
4,540
89,632
4,548
91,224
4,567
92,552
4,588
93,726
5,090
96,119
4,583
97,372
7,017 102,202
2,994 101,748
3,908 100,919
Credit
Cooperatives
16,349
19,172
21,307
21,474
21,854
22,589
23,158
21,513
20,976
20,099
19,267
18,440
17,854
16,599
14,563
Labor
Banks
5,909
6,417
6,914
7,370
7,844
8,345
8,849
9,187
9,535
10,081
10,532
10,978
11,710
12,304
13,089
Federations
519
626
730
¥billion)
Total
446,397
501,598
526,686
526,243
531,607
541,449
555,711
550,601
551,271
556,394
572,730
575,717
611,513
609,375
622,556
Number of Insured Financial Institutions
Banks
City
Banks
164
164
163
162
160
164
167
174
176
176
173
171
167
164
158
13
13
12
11
11
11
11
11
10
10
9
9
9
7
7
Regional Regional
Banks
Banks II
64
64
64
64
64
64
64
64
64
64
64
64
64
64
64
68
68
68
68
66
65
65
65
65
64
61
60
57
56
53
Trust
Banks
16
16
16
16
16
21
23
30
33
33
34
33
31
29
27
Long-term Shinkin
Credit
Banks
Banks
3
455
3
454
3
451
3
440
3
435
3
428
3
421
3
416
3
410
3
401
3
396
3
386
3
372
3
349
2
326
Credit
Cooperatives
Labor
Banks
Federations
Total
419
415
408
398
394
384
374
370
364
352
323
292
281
247
191
47
47
47
47
47
47
47
47
47
47
41
41
40
21
21
3
3
3
1,085
1,080
1,069
1,047
1,036
1,023
1,009
1,007
997
976
933
890
863
784
699
Table 3 Chronology of Events
Year Month
Events
Month
71
Jul.
86
Apr.
88
91
92
Jul.
Laws, measures and policies
# of failed institutions for
each fiscal year
Shinkin Credit
Bank
bank
cooperative
Deposit insurance corporation established.
MOF introduces the new standard that the capital ratio of financial institutions should be
4% or higher for domestically operating banks and 6% or higher for internationally
operating banks (For shinkin banks and credit cooperatives the ratio was set to be applied
from FY1990).
Basel Accord
1
Mar.
93
MOF announces that the capital ratio of financial institutions which operate overseas
should be 8% or higher.
1
93
1
Resolution of Tokyo Kyowa Credit and Anzen credit cooperatives
94 Dec.
announced.
MOF announced that the estimated outstanding of NPLs of the deposit95 Jun.
taking financial institutions in March 1995 was about ¥40 trill.
Jul. Cosmo Credit Cooperative ordered to suspend operations.
Kizu Credit Cooperative ordered to suspend operations. Resolution of
Aug.
Hyogo Bank announced.
96
Nov.
1
4
2
2
Dec.
Financial system research council releases final report on measures for the maintenance of
financial system stability.
Jun.
Three bills including the amended Deposit insurance law were passed (Special treatment
of blanket guarantee of deposit insurance introduced until the end of March 2001).
1
Jun.
Government published a detailed plan of Japanese version of the Big Bang.
3
14
Dec.
Apr.
A bill to amend the Deposit insurance law passed (Financial assistance to specified
Prompt corrective action (PCA) introduced.
Four bills implementing the Japanese Big Bang (Financial reform law, SPC law, Revision
of 13 laws to comply with SPC law, and the Obligation netting law) passed.
5
25
1
6
Financial system reform (Japanese version of the Big Bang) announced.
Hanwa Bank ordered to suspend operations.
97
Nov. Sanyo Securities files application for rehabilitation.
Resolution of Hokkaido Takusyoku Bank announced.
Yamaichi Securities announces suspension of operations.
98
Jun.
Financial supervisionary agency (FSA) inaugurated.
Oct.
Dec.
LTCB placed under special public administration.
NCB placed under special public administration.
Jun.
99
Dec.
2000
2001
Apr.
2002
Apr.
Jul.
Dec.
Three ruling parties agree to postpone lifting of special measures concerning the deposit
insurance system (end -March 2001 to end-March 2002).
Supervision of credit cooperative transferred from local governments to FSA.
The coverage of deposit protection up to ¥10 mil. reintroduced for time deposits
(Unlimited protection for demand deposits continues until March 2003.)
Minister of Financial services announced the continuation of unlimited protection for
demand deposits until March 2005.
A bill to amend the deposit insurance law passed (Introduce full protection for payment
and settlement deposits from April 2005 (as a permanent measure)).
Note: Prepared by the author using the information published by the Financial services agency, Deposit insurance corporation and Financial Book Consultants Ltd.
5
10
29
2
2
13
12
41
Table 4 Descriptive Sample Statistics (FY92-FY2001)
Variable
Total assets (Billion yen)
Deposits (Billion yen)
Capital (Billion yen)
Operational profits (Billion yen)
Growth rate of deposits
Capital asset ratio (t-1)
Real-estate related loan share (t-1)
Liquid assets/total assets (t-1)
Operational profits/total assets (t-1)
Ln(total assets) (t-1)
Demand deposits/deposits
D(Demand deposits/deposits)
Interest rate
Variable
Total assets (Billion yen)
Deposits (Billion yen)
Capital (Billion yen)
Operational profits (Billion yen)
Growth rate of deposits
Capital asset ratio (t-1)
Real-estate related loan share (t-1)
Liquid assets/total assets (t-1)
Operational profits/total assets (t-1)
Ln(total assets) (t-1)
Demand deposits/deposits
D(Demand deposits/deposits)
Interest rate
Shinkin bank and Credit cooperative
Std.
No. of
No. of
Mean
Min
Dev.
obs. institutions
684
2.7
5471
211.8 312.6
5479
686
187.7
281.9
2.6
5471
684
10.6
14.8
-119.0
5345
684
1.3
2.0
-6.4
5479
686
0.021
0.035 -0.196
5479
686
0.052
0.018 -0.023
5479
686
0.026
0.012
0.002
5479
686
0.197
0.079
0.025
5479
686
0.006
0.004 -0.079
5479
686
11.618 1.118
8.039
5469
684
0.169
0.049
0.024
5469
684
0.008
0.019 -0.123
5467
684
0.016
0.015
0.001
Shinkin bank
No. of
No. of
Mean Std. Dev.
obs. institutions
445
356.6
3718
271.5
445
322.4
3719
241.0
445
16.5
3718
13.8
445
2.3
3672
1.7
445
0.029
3719
0.025
445
0.017
3719
0.055
445
0.011
3719
0.025
3719
445
0.188
0.071
445
0.003
3719
0.007
445
0.975
3719
11.985
445
0.046
3718
0.182
445
0.018
3718
0.009
445
0.015
3718
0.016
Max
3282.1
3035.5
145.4
22.9
0.324
0.145
0.141
0.768
0.104
15.004
0.472
0.196
0.064
Min
Max
6.8
5.2
-14.9
-6.4
-0.149
-0.023
0.002
0.025
-0.009
8.826
0.061
-0.048
0.001
3282.1
3035.5
145.4
22.9
0.310
0.145
0.128
0.768
0.038
15.004
0.388
0.149
0.052
Credit cooperative
No. of
No. of
Mean
Std. Dev. Min
Max
obs. institutions
1753
239
85.0
108.4
2.7
1290.0
1760
241
75.1
95.2
2.6
1110.0
1753
239
3.7
6.0 -119.0
50.0
1673
239
0.5
0.9
-3.0
15.3
1760
241
0.012
0.043 -0.196
0.324
1760
241
0.046
0.019 -0.012
0.128
1760
241
0.027
0.015
0.002
0.141
1760
241
0.216
0.091
0.043
0.669
1760
241
0.006
0.006 -0.079
0.104
1760
241
10.844
0.998
8.039
13.902
1751
239
0.143
0.045
0.024
0.472
1751
239
0.006
0.020 -0.123
0.196
1749
239
0.018
0.015
0.001
0.064
Table 5 Response of Growth of Deposits to Bank Risk Characteristics (Cross Section Regressions, FY1992-FY2001)
Bank type: Shinkin bank & Credit Cooperative
C/A (Capital asset ratio) (t-1)
Real-estate related loan share (t-1)
Liquid assets/total assets (t-1)
Operational profits/total assets (t-1)
ln(total assets) (t-1)
No. of observations
R-squared
RMSE
92FY
0.101
(0.107)
0.095
(0.143)
0.001
(0.019)
0.925 *
(0.499)
0.005 ***
(0.002)
648
0.153
0.033
93FY
0.015
(0.084)
0.400 **
(0.171)
0.000
(0.017)
1.630 ***
(0.568)
0.003 *
(0.002)
633
0.184
0.030
94FY
0.091
(0.089)
0.051
(0.116)
-0.036 *
(0.021)
0.535
(0.616)
0.006 ***
(0.002)
622
0.209
0.029
95FY
0.126
(0.078)
0.036
(0.177)
-0.024
(0.019)
1.381 ***
(0.527)
0.004 **
(0.002)
618
0.240
0.029
96FY
0.140
(0.060)
0.241
(0.113)
-0.008
(0.020)
0.530
(0.313)
0.003
(0.002)
535
0.226
0.023
97FY
0.268 ***
(0.073)
0.188
(0.130)
0.031
(0.020)
0.313 *
(0.174)
0.001
(0.002)
507
0.291
0.026
98FY
0.304 ***
(0.094)
-0.028
(0.101)
-0.001
(0.021)
0.316
(0.699)
-0.001
(0.002)
531
0.127
0.030
99FY
0.465 ***
(0.101)
-0.074
(0.128)
-0.031
(0.038)
1.581 ***
(0.288)
0.002
(0.002)
502
0.232
0.030
00FY
0.299 ***
(0.073)
-0.174 *
(0.099)
-0.012
(0.023)
0.860 **
(0.369)
0.000
(0.002)
473
0.270
0.029
01FY
0.425 ***
(0.094)
-0.307 **
(0.131)
0.034
(0.022)
2.052 ***
(0.707)
-0.001
(0.003)
410
0.294
0.035
92FY
0.141
(0.108)
0.346 **
(0.154)
-0.013
(0.021)
1.138 **
(0.482)
0.004 *
(0.002)
418
0.248
0.028
93FY
0.125
(0.106)
0.207
(0.163)
0.018
(0.023)
1.164
(0.723)
0.004 **
(0.002)
411
0.215
0.027
94FY
0.119
(0.102)
0.122
(0.132)
-0.026
(0.031)
-0.050
(0.627)
0.005 ***
(0.002)
406
0.222
0.024
95FY
0.109
(0.073)
0.188
(0.181)
-0.008
(0.022)
1.052 **
(0.493)
0.003
(0.002)
401
0.155
0.023
96FY
0.103
(0.066)
0.287 **
(0.116)
-0.011
(0.023)
0.843 **
(0.355)
0.000
(0.002)
370
0.194
0.020
97FY
0.281 ***
(0.079)
0.044
(0.128)
0.012
(0.022)
-0.469
(0.570)
-0.001
(0.002)
362
0.383
0.022
98FY
0.361 ***
(0.114)
0.002
(0.121)
-0.060 **
(0.025)
-0.184
(1.002)
-0.002
(0.003)
377
0.174
0.026
99FY
0.487 ***
(0.121)
-0.026
(0.108)
-0.018
(0.024)
0.675
(0.485)
0.003
(0.003)
353
0.185
0.027
00FY
0.187 **
(0.081)
-0.011
(0.085)
0.005
(0.021)
1.106 **
(0.517)
-0.004 *
(0.002)
324
0.158
0.024
01FY
0.352 ***
(0.105)
-0.222 *
(0.119)
0.016
(0.025)
1.724 ***
(0.590)
-0.003
(0.003)
297
0.242
0.030
92FY
-0.031
(0.194)
-0.240
(0.244)
0.030
(0.033)
0.864
(0.682)
0.008 ***
(0.003)
230
0.110
0.040
93FY
-0.077
(0.147)
0.561 **
(0.280)
-0.018
(0.027)
2.252 **
(0.913)
0.002
(0.003)
222
0.197
0.035
94FY
0.124
(0.167)
-0.033
(0.193)
-0.031
(0.027)
1.093
(0.999)
0.008 ***
(0.003)
216
0.225
0.036
95FY
0.168
(0.172)
-0.160
(0.320)
-0.040
(0.030)
1.759 *
(0.908)
0.005
(0.004)
217
0.264
0.038
96FY
0.194
(0.135)
0.152
(0.203)
-0.004
(0.037)
0.352
(0.551)
0.007 **
(0.003)
165
0.160
0.029
97FY
0.237
(0.167)
0.382 *
(0.215)
0.055
(0.040)
0.469 **
(0.211)
0.004
(0.004)
145
0.171
0.036
98FY
0.231
(0.151)
0.001
(0.141)
0.051
(0.036)
0.841
(0.738)
0.005
(0.003)
154
0.218
0.035
99FY
0.413 **
(0.158)
-0.168
(0.216)
-0.082
(0.068)
1.799 ***
(0.292)
0.000
(0.004)
149
0.308
0.036
00FY
0.557 ***
(0.159)
-0.325 **
(0.151)
-0.051
(0.049)
0.779
(0.512)
0.004
(0.004)
149
0.173
0.037
01FY
0.686 ***
(0.180)
-0.420 *
(0.242)
0.014
(0.044)
2.205 *
(1.114)
0.000
(0.006)
113
0.251
0.047
**
**
*
*
Bank type: Shinkin bank
C/A (Capital asset ratio) (t-1)
Real-estate related loan share (t-1)
Liquid assets/total assets (t-1)
Operational profits/total assets (t-1)
ln(total assets) (t-1)
No. of observations
R-squared
RMSE
Bank type: Credit Cooperative
C/A (Capital asset ratio) (t-1)
Real-estate related loan share (t-1)
Liquid assets/total assets (t-1)
Operational profits/total assets (t-1)
ln(total assets) (t-1)
No. of observations
R-squared
RMSE
Note: The estimation method is OLS. Heteroscedasticity-robust standard errors are given in parentheses. ***, **, and * indicate statistical significance at 1, 5 and 10 percent, respectively.
Table 6 Response of Growth of deposits to Bank Risk Characteristics (Panel Regressions, FY1992-FY2001)
Dependent Variable: The growth rate of deposits
C/A (Capital asset ratio) (t-1)
Real-estate related loan share (t-1)
liquid assets/total assets (t-1)
Operational profits/total assets (t-1)
ln(total assets) (t-1)
C/A (t-1)*95FY shift dummy
ln(total assets) (t-1)*95FY shift dummy
C/A (t-1)*99FY shift dummy
Real-estate related loan share(t-1)*99FY shift dummy
Operational profits/total assets(t-1)*99FY shift dummy
ln(total assets) (t-1)*99FY shift dummy
Shinkin & Credit
cooperative
(1)
(2)
0.480 ***
0.128
(0.059)
(0.080)
0.134 **
0.295
(0.061)
(0.079)
-0.004
-0.008
(0.011)
(0.010)
0.472 ***
0.362
(0.120)
(0.146)
-0.036 *** -0.045
(0.005)
(0.005)
0.198
(0.053)
0.003
(0.001)
0.220
(0.051)
-0.174
(0.072)
0.486
(0.233)
0.005
(0.001)
Interest rate
R-sq.
No. of observations
No. of institutions
0.211
5479
686
0.233
5479
686
Shinkin
***
**
***
***
***
***
**
**
***
(3)
0.135 *
(0.080)
0.273 ***
(0.080)
-0.011
(0.010)
0.414 ***
(0.147)
-0.045 ***
(0.005)
0.210 ***
(0.053)
0.003 ***
(0.001)
0.219 ***
(0.051)
-0.157 **
(0.072)
0.425 *
(0.234)
0.005 ***
(0.001)
0.678 **
(0.276)
0.233
5467
684
(4)
(5)
(6)
0.389 *** 0.122
0.125
(0.068)
(0.095)
(0.094)
0.081
0.178 *
0.123
(0.073)
(0.092)
(0.092)
-0.008
-0.009
-0.009
(0.012)
(0.012)
(0.012)
0.328 *
0.373 *
0.560 **
(0.185)
(0.217)
(0.221)
-0.073 *** -0.082 *** -0.079 ***
(0.007)
(0.007)
(0.007)
**
0.130
0.149 **
(0.063)
(0.063)
0.000
-0.001
(0.001)
(0.001)
0.230 *** 0.23503 ***
(0.057)
0.05713
-0.127
-0.097
(0.084)
(0.085)
0.231
0.020
(0.350)
(0.352)
0.004 ***
0.004 ***
(0.001)
(0.001)
1.425 ***
(0.369)
0.199
0.210
0.214
3719
3719
3718
445
445
445
Credit cooperative
(7)
0.511
(0.111)
0.309
(0.111)
-0.013
(0.020)
0.497
(0.175)
-0.026
(0.007)
0.282
1760
241
(8)
0.237
(0.151)
***
0.385 **
(0.150)
-0.014
(0.020)
***
0.265
(0.220)
*** -0.028 ***
(0.007)
0.164
(0.105)
0.001
(0.002)
0.140
(0.111)
-0.109
(0.134)
0.718 **
(0.350)
0.002
(0.002)
***
0.288
1760
241
(9)
0.264 *
(0.151)
0.395 ***
(0.150)
-0.021
(0.020)
0.291
(0.221)
-0.028 ***
(0.007)
0.165
(0.106)
0.001
(0.002)
0.141
(0.111)
-0.104
(0.135)
0.695 **
(0.350)
0.002
(0.002)
0.575
(0.467)
0.289
1749
239
Note:
Estimates are reported following the results of the Hausman test for each equation. Standard errors are in parentheses. ***, **, and * indicate statistical significance at 1, 5 and 10
percent, respectively. Estimators for time dummies, fixed effects, regional effects, the constant term and a dummy for the institutions that have changed their names during the fiscal
year are not reported in the table. A credit corporative dummy is included in the regressions (1), (2) and (3), though they are not reported in the table.
Table 7 Frequency the Technical Key-words,"pay-off"
and "capital ratio," Appeared in Major Newspapers
Fiscal year
1992
Pay-off
Nikkei
Asahi
0
0
Capital ratio
Nikkei
Asahi
567
97
1993
0
0
148
24
1994
39
18
97
17
1995
117
69
189
59
1996
37
29
197
81
1997
37
29
477
256
1998
124
49
552
348
1999
519
277
374
315
2000
165
128
240
211
2001
623
559
325
368
2002
672
580
394
360
Note: Figures represent sum of frequencies of morning and evening
newspapers, obtained from Nikkei Telecom 21.
Table 8 Response of Share of demand Deposits to Bank Risk Characteristics (FY1991-FY2001)
Dependent Variable: ∆(The share of demand deposits in total deposits )
Shinkin & Credit
cooperative
1
(1)
(2)
Shinkin bank
(3)
(4)
Credit cooperative
(5)
(6)
(7)
(8)
(9)
92FY-00FY 92FY-01FY 92FY-01FY 92FY-00FY 92FY-01FY 92FY-01FY 92FY-00FY 92FY-01FY 92FY-01FY
Capital asset ratio (t-1)
Real-estate related loan share/total assets (t-1)
liquid assets/total assets (t-1)
Operational profits/total assets (t-1)
Ln(total assets) (t-1)
0.001
-0.044 ***
(0.008)
(0.010)
0.010
0.055 **
(0.014)
(0.023)
0.011 *** 0.012 ***
(0.003)
(0.003)
-0.051
-0.100 *
(0.040)
(0.057)
0.000 **
0.001 ***
(0.000)
(0.000)
C/A (t-1)* 2001FY dummy
Real-estate related loan share (t-1)* 2001FY dummy
liquid assets/total assets (t-1)* 2001FY dummy
Operational profits/total assets (t-1)* 2001FY dummy
Ln(total assets) (t-1)* 2001FY dummy
R-sq.
RMSE
No. of observations
No. of institutions
0.254
0.010
5060
681
0.613
0.012
5469
684
0.005
(0.009)
0.004
(0.014)
0.012
(0.003)
-0.049
(0.040)
0.000
(0.000)
-0.405
(0.055)
0.337
(0.108)
-0.041
(0.016)
-1.356
(0.445)
0.005
(0.002)
0.651
0.012
5469
684
-0.004
(0.010)
0.028
(0.015)
*** 0.012
(0.003)
-0.110
(0.062)
*
0.000
(0.000)
*
***
*
**
-0.055
(0.012)
0.065
(0.023)
0.013
(0.003)
-0.111
(0.071)
0.001
(0.000)
***
***
***
***
***
0.335
0.008
3421
443
Notes:
1. Demand deposits include current accounts.
2. The estimation method is OLS. Heteroscedasticity-robust standard errors are given in parentheses.
0.675
0.010
3718
445
***
***
***
***
-0.001
(0.010)
0.019
(0.015)
0.012
(0.003)
-0.123
(0.062)
0.000
(0.000)
-0.382
(0.060)
0.264
(0.088)
-0.043
(0.017)
-1.051
(0.461)
0.008
(0.001)
0.718
0.010
3718
445
***
**
0.010
(0.017)
-0.013
(0.026)
0.009 *
(0.005)
-0.015
(0.049)
0.001
(0.000)
-0.027
(0.020)
0.039
(0.044)
0.008
(0.005)
-0.090
(0.077)
0.000
(0.001)
***
***
**
**
***
0.148
0.012
1639
238
0.515
0.014
1751
239
0.010
(0.018)
-0.013
(0.026)
0.010
(0.005)
-0.005
(0.049)
0.001
(0.000)
-0.415
(0.118)
0.355
(0.201)
-0.047
(0.032)
-1.532
(0.634)
0.000
(0.004)
0.549
0.014
1751
239
*
***
*
**
Table 9 Response of Growth of Deposits to Bank Risk Characteristics (FY1992-FY2002)
Dependent Variable: The growth rate of deposits
Shinkin
bank &
Shinkin bank
Credit
cooperative
(1)
(2)
0.124 *
0.090
C/A (Capital asset ratio) (t-1)
(0.075)
(0.980)
0.308 ***
0.222 **
Real-estate related loan share (t-1)
(0.077)
(0.089)
-0.007
-0.005
Liquid assets/total assets (t-1)
(0.010)
(0.011)
0.365 **
0.381 *
Operational profits/total assets (t-1)
(0.144)
(0.215)
-0.035 ***
-0.062 ***
ln(total assets) (t-1)
(0.004)
(0.006)
0.190 ***
0.118 *
C/A (t-1) * 95FY shift dummy
(0.052)
(0.063)
0.003 ***
0.000
ln(total assets) (t-1) * 95FY shift dummy
(0.001)
(0.001)
0.225 ***
0.231 ***
C/A (t-1) * 99FY shift dummy
(0.050)
(0.058)
-0.191 ***
-0.147 *
Real-estate related loan share (t-1) * 99FY shift dummy
(0.071)
(0.084)
0.479 **
0.211
Operational profits/total assets (t-1) *99FY shift dummy
(0.232)
(0.350)
0.005 ***
0.004 ***
ln(total assets) (t-1) * 99FY shift dummy
(0.001)
(0.001)
<2002FY cross dummies>
-0.203 ***
-0.152 *
C/A (t-1) * 02FY shift dummy
(0.075)
(0.082)
0.264 **
Real-estate related loan share (t-1) * 02FY shift dummy (0.106)
0.088
(0.108)
-0.002
liquid assets/total assets (t-1) * 02FY shift dummy
(0.003)
0.021
(0.022)
0.324
Operational profits/total assets (t-1) *02FY shift dummy -(0.270)
0.310
(0.419)
(0.000)
-0.001
ln(total assets) (t-1) * 02FY shift dummy
0.001
(0.002)
R-sq.
0.237
0.215
No. of observations
5886
4025
No. of institutions
689
448
Note: As in Table 6.
Credit
cooperative
(3)
0.252
(0.143)
0.382
(0.145)
-0.016
(0.019)
0.255
(0.218)
-0.020
(0.007)
0.157
(0.105)
0.001
(0.002)
0.146
(0.110)
-0.121
(0.132)
0.725
(0.346)
0.002
(0.002)
-0.247
(0.184)
-0.085
(0.155)
0.050
(0.048)
-0.656
(0.521)
0.006
(0.004)
0.291
1861
241
*
***
***
**
Figure 1 Composition of Money Stock
(¥ trillion)
700
600
Reintroduction of "Pay-off"
for time deposits
500
Time deposits (quasi money)+CD
400
300
200
Deposit Money
100
Cash currency in circulation
0
II
III
98
IV
I
II
III
99
IV
I
II
III
2000
IV
I
II
III
2001
Source: Bank of Japan (http://www.boj.or.jp/en/stat/stat_f.htm).
IV
I
II
III
2002
IV
I
II
III
2003
IV