Bank Size and Lending Relationships in Japan

Abstract

Current theoretical and empirical research suggests that small banks have a comparative advantage in processing soft information and delivering relationship lending. The most comprehensive analysis of this view found using U.S. data that smaller SMEs borrow from smaller banks and smaller banks have stronger relationships with their borrowers (Berger, Miller, Petersen, Rajan, and Stein 2005) (BMPRS). We employ essentially the same methodology as BMPRS on a unique Japanese data set and obtained findings that are quite interesting from an international comparison point of view. We found like BMPRS that larger firms tend to borrow from larger banks. However, unlike BMPRS we did not find that this was because larger firms are more transparent. Together these results imply that large banks do not necessarily have a comparative advantage in extending transactions-based lending. We also found like BMPRS that smaller banks have strong relationships with their borrowers. However, we find that banking relationships in the U.S. and Japan are strong in somewhat different dimensions. Our paper clarifies these and other interesting similarities and differences between the U.S. and Japan.

Soft Information Production in Sme Lending

“…Berger et al () report, based on evidence about the disadvantages of large banks in the production and use of soft information, as well as the link between bank size and the communication mode, shows that firms do business with large banks in more impersonal ways (by mail or on the phone) than through personal contact. Uchida, Udell, and Watanabe () show that for the Japanese market, consistent with Berger et al, smaller banks have more frequent contact with borrowers even after controlling for the information verifiability of borrowers.…”

The Repository of Soft Information within Bank Organizations

“…The TSR database has been used by the SME Agency of the Government of Japan for its annual issues of the White Paper on Small and Medium Enterprises , and is also used in many important papers on banking in Japan, for example, Uchida, Udell, and Watanabe (), Ono and Uesugi (), and Uchida, Udell, and Yamori ().…”

Will FinTech make regional banks superfluous for small firm finance? Observations from soft information‐based lending in Germany

“…Accordingly, lenders need private and local information on these firms to estimate PD. Such information—termed soft information in literature on small firm finance (Behr et al, ; Berger et al, ; Stein, ; Uchida et al, )—“cannot be directly verified by anyone other than the agent who produces it” according to Stein's (, p. 1982) definition. Hence, transmission within a hierarchical organisation or across distances causes difficulties.…”