The interplay between quantitative easing, risk and competition: The case of Japanese banking

Abstract

The Japanese economy is infamous for the magnitude of bank nonperforming loans that have originated back in the 1990s, whereas they are still causing controversies. Japan is also known for an extended quantitative easing programme of unprecedented scale.

The Interplay Between Problem Loans and Japanese Bank Productivity

“…It was even negative in City Banks, -0.43 and Regional Banks I, -0.7. This might be due to quantitative easing policy that the scale effect was quite large in the second and the last two sub-periods, especially for Regional Banks (Mamatzakis E and F Avalos 2018;Mamatzakis and Vu 2018). Other studies also find that small Japanese banks, in particular Regional Banks, exhibit increasing returns to scale (Altunbas et al, 2000;Azad, Yasushi, Fang, & Ahsan, 2014;Fukuyama, 1993).…”

“…The next stage of our analysis investigates whether there is a tendency of convergence in TFP growth across regions and time. During the course of bank restructuring and promoting economic growth, the Japanese government has enacted a variety of support measures, including quantitative easing policy, aiming to raise bank lending to nonfinancial sectors (Mamatzakis E and F Avalos 2018;Mamatzakis and Vu 2018). Hence, if indeed the restructuring were working, we would expect a tendency of convergence in bank productivity growth among banks and across regions over time.…”

“…We, thus, fill a gap in the literature and apply for the first time a productivity growth decomposition to Japanese banks, where problem loans' impact would be revealed. 1 Previous literature has considered nonperforming loans as uncontrollable inputs or undesirable outputs in the banking production process (Assaf, Matousek, & Tsionas, 2013;Barros et al, 2012;Drake & Hall, 2003;Fukuyama & Weber, 2008;Glass, McKillop, Quinn, & Wilson, 2014;Hughes & Mester, 2010;Mamatzakis, Matousek, & Vu, 2016;Mamatzakis and Vu 2018;Mamatzakis and Tsionas 2017). We follow Drake and Hall (2003) and Hughes and Mester (2010) to treat bankrupt and restructured loans as uncontrollable inputs in our productivity decomposition.…”

“…For a panel data variable, it can detect convergence in sub-groups even though convergence is rejected at the whole panel level. After more than a decade of the banking crisis and structural reforms, converging on productivity growth would indicate that Japanese banks have been brought together to facilitate further necessary policy changes, especially on the ground of continued deflation and low economic growth (Mamatzakis E and F Avalos 2018;Mamatzakis and Vu 2018).…”

The Nexus Between Underlying Dynamics of Bank Capital Buffer and Performance

“…To this day, there is not a clear consensus in the literature on the relationship between the capital buffer and bank performance. There are studies that provide evidence for a negative association between bank performance and capital buffer (Alfon et al 2004;Ayuso et al 2004;Berger and Bonaccorsi di Patti 2006;Jokipii and Milne 2008;Mamatzakis and Tsionas, 2019;Mamatzakis and Vu 2018;Mamatzakis and Tsionas, 2017) suggesting that strong bank performance substitutes for capital as a cushion against unexpected losses. Another strand of literature (Berger 1995, Flannery andRangan, 2008;Nier and Bauman 2006 Mamatzakis and Tsionas, 2017) testing whether increasing the risk taken by banks force them to maintain a higher capital buffer.…”