This paper empirically examines the effect of bank's revenue diversification across different activities on the stock-based return and risk measures using data on the Japanese banking sector. In the analyses, we measure non-interest income share as a measure for revenue diversification of banks. These analyses confirm the positive effect of revenue diversification by increasing non-interest income share on the franchise values of banks, while there is no strong evidence that it reduce bank risks. In contrast, when non-interest income is broken down into its constituent parts-fee income, trading income and other non-interest income-we find that a shift toward fee income-generating business decreases all types of risks (systematic risk, idiosyncratic risk, and total risk). Furthermore, we find that the effects of bank's revenue diversification on franchise value and risks are contingent on organizational forms and performance of traditional banking business. JEL Classification: G11, G21, G28

No abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in ASIAN DEVELOPMENT BANK INSTITUTE ASIAN DEVELOPMENT BANK INSTITUTEJust before Japan's financial crisis of 1927, nearly 90 percent of ordinary banks were connected to non-banking companies through the interlocking of their directors and auditors. Moreover, such interlocking was more pervasive in the large-sized banks. In many cases, interlocking of directors and auditors resulted from the fact that the banks and non-banking companies were owned by the same large shareholders.This finding is consistent with the accepted "organ bank" hypothesis which asserts that (i) banks were organically connected with industrial companies and so freely extended to them unsafe loans which went bad; and (ii) minority shareholders and depositors of such organ banks were therefore exploited by the core members of the corporate group, composed of the bank and industrial companies. The lessons from this important episode are particularly relevant to contemporary governance issues in Asian and other economies. Measuring the Extent and III PREFACEThe ADB Institute aims to explore the most appropriate development paradigms for Asia composed of well-balanced combinations of the roles of markets, institutions, and governments in the post-crisis period.Under this broad research project on development paradigms, the ADB Institute Research Paper Series will contribute to disseminating works-in-progress as a building block of the project and will invite comments and questions.

In this paper, we explore the structure and implications of interbank networks in prewar Japan, focusing on director interlocking. We find that approximately half the banks had at least one connection with another bank through director interlocking, and that a bank that had connections with other banks was less likely to fail than a bank without a network. The quality of networks also matters in the sense that the failure probability of a bank with a network was negatively associated with the profitability of the connected banks. On the other hand, there is no strong evidence of financial contagion through networks. In addition, networks of director interlocking contributed to the stabilization of the financial system through coordinating bank mergers.JEL Classification: G21, G34, L14, L22, N25

This article investigates the impact of bank consolidations promoted by government policy, using data from pre-war Japan when the Ministry of Finance promoted bank consolidations through the Bank Law of 1927. We argue that policy-promoted consolidation had a positive effect on deposit growth, especially in the period when the financial system was unstable. On the other hand, it had a negative effect on profitability, particularly when there was no dominant bank among the participants or when more than two banks participated in the consolidation. Policy-promoted consolidation in such cases was likely to be accompanied by large organisational cost.