We appreciate valuable comments from Andy Rose, Taka Ito, Hiro Ito, Barry Williams, and other participants at the NBER-EASE eighteenth annual conference. 266 Kaoru Hosono, Koji Sakai, and Kotaro Tsuru 1. City banks and regional banks are both corporations licensed under Bank Law, while shinkin banks are cooperatives of small-and medium-sized enterprises (SMEs) licensed under Shinkin Bank Law. Regional banks are classified into first-tier and second-tier regional banks according to the associations they belong to. There are usually one relatively large firsttier regional bank and some relatively small second-tier regional banks in one prefecture. 2. We could analyze the impact of merger announcement on abnormal returns for the mergers of listed major banks (e.g., Okada 2005). However, it would still be difficult to analyze the long-run performance of stock returns even for the mergers of listed major banks because most of the consolidated major banking firms newly established holding companies that owned the share of other financial institutions (e.g., nonbanks, securities companies, and credit card companies). For the pitfalls of using short-run responses of stock market prices to merger announcement when mergers are a relatively new phenomenon, see Delong and Deyoung (2007). 3. As of March 2001, for example, the share of deposits at city banks, first-tier regional banks, second-tier regional banks, and shinkin banks are 29.2 percent, 25.5 percent, 8.2 percent, and 15.1 percent, respectively. Data source is the Bank of Japan Web site: http:// www.boj.or.jp. Consolidation of Banks in Japan: Causes and Consequences 267 4. No merger was conducted across different types of banks during the sample period, and there was one sale of business of a failed bank across bank types: the business of the failed city bank, Hokkaido Takushoku Bank, was sold to a regional bank, Hokuyo Bank, and a trust bank, Chuo Trust Bank, in 1997. 268 Kaoru Hosono, Koji Sakai, and Kotaro Tsuru 5. See also Yamori and Harimaya (2004) for the study of the mergers of shinkin banks. Consolidation of Banks in Japan: Causes and Consequences 269 6. For example, when the largest regional bank in Tochigi Prefecture, Ashikaga Bank, was failing, the government temporarily nationalized it to avoid a regional systemic risk. Though the government has not recapitalized shinkin banks so far, this does not necessarily mean that the government does not care about the stability of the local financial market. It has not been necessary for the government to recapitalize shinkin banks because the central financial institution of shinkin banks, called Central Shinkin Bank, recapitalized member shinkin banks when necessary. 270 Kaoru Hosono, Koji Sakai, and Kotaro Tsuru 7. Mitsui Bank acquired Taiyo Kobe in 1990. 8. Hirosaki Sogo Bank was acquired by Seiwa Bank in 1976. Takachiho Sogo Bank was acquired by Nishinippon Sogo Bank in 1984. Heiwa Sogo Bank was acquired by Sumitomo Bank in 1986. 9. For the details of the convoy system, see Hoshi and Kashyap (2001). For a typ...

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