Did Mergers Help Japanese Mega-Banks Avoid Failure? Analysis of the Distance to Default of Banks
AbstractIn the late 1990s, several large Japanese banks failed for the first time in its postwar history. As the financial environment was deteriorating further, several remaining banks decided to merge among themselves, presumably, to make their operations more efficient to avoid failures. This paper defines, calculates and analyzes the distance to default (DD), a concept of credit risk in corporate finance, of Japanese large banks. The DD helps us to answer a question whether mergers in the late 1990s and 2000s made the merged banks financially more robust as intended. The novelty of the paper is to develop a method of analyzing the DD for banks that experience a merger, and to apply the method to the Japanese banking data. Our findings include: (1) A merged bank fundamentally inherits financial soundness of pre-merged banks, without adding special value from the merger. A merger of sound (unsound) banks produced a sound (unsound, respectively) merged financial institution; and (2) In some cases, a merged bank experienced a negative DD right after the merger. The findings are consistent with a view that a primary objective of a merger was to take advantage of the perceived too-big-to-fail policy, rather than to pursue a radical reform. Another interpretation is that mergers with intention of enhancing efficiency resulted in failed implementation of true operational efficiency, such as quick integration of computer operation systems and elimination of duplicating branches.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14518.
Date of creation: Dec 2008
Date of revision:
Publication status: published as Harada, Kimie & Ito, Takatoshi, 2011. "Did mergers help Japanese mega-banks avoid failure? Analysis of the distance to default of banks," Journal of the Japanese and International Economies, Elsevier, vol. 25(1), pages 1-22, March.
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Other versions of this item:
- Harada, Kimie & Ito, Takatoshi, 2011. "Did mergers help Japanese mega-banks avoid failure? Analysis of the distance to default of banks," Journal of the Japanese and International Economies, Elsevier, vol. 25(1), pages 1-22, March.
- G19 - Financial Economics - - General Financial Markets - - - Other
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-12-14 (All new papers)
- NEP-BAN-2008-12-14 (Banking)
- NEP-BEC-2008-12-14 (Business Economics)
- NEP-COM-2008-12-14 (Industrial Competition)
- NEP-IND-2008-12-14 (Industrial Organization)
- NEP-RMG-2008-12-14 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Duffie, Darrell & Saita, Leandro & Wang, Ke, 2007.
"Multi-period corporate default prediction with stochastic covariates,"
Journal of Financial Economics,
Elsevier, vol. 83(3), pages 635-665, March.
- Darrel Duffie & Leandro Saita & Ke Wang, 2005. "Multi-Period Corporate Default Prediction With Stochastic Covariates," CARF F-Series CARF-F-047, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
- Darrell Duffie & Leandro Siata & Ke Wang, 2006. "Multi-Period Corporate Default Prediction With Stochastic Covariates," NBER Working Papers 11962, National Bureau of Economic Research, Inc.
- Darrel Duffie & Leandro Saita & Ke Wang, 2005. "Multi-Period Corporate Default Prediction With Stochastic Covariates," CIRJE F-Series CIRJE-F-373, CIRJE, Faculty of Economics, University of Tokyo.
- Merton, Robert C., 1973.
"On the pricing of corporate debt: the risk structure of interest rates,"
684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
- Takatoshi Ito & Kimie Harada, 2000.
"Japan Premium and Stock Prices: Two Mirrors of Japanese Banking Crises,"
NBER Working Papers
7997, National Bureau of Economic Research, Inc.
- Takatoshi Ito & Kimie Harada, 2005. "Japan premium and stock prices: two mirrors of Japanese banking crises," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(3), pages 195-211.
- Calomiris, Charles W., 1999. "Gauging the efficiency of bank consolidation during a merger wave," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 615-621, February.
- Reint Gropp & Marco Lo Duca & Jukka Vesala, 2007.
"Cross-Border Bank Contagion in Europe,"
Working Paper Series: Finance and Accounting
175, Department of Finance, Goethe University Frankfurt am Main.
- Amadou N. R. Sy & Jorge A. Chan-Lau, 2006. "Distance-To-Default in Banking," IMF Working Papers 06/215, International Monetary Fund.
- Kaoru Hosono & Koji Sakai & Kotaro Tsuru, 2009.
"Consolidation of Banks in Japan: Causes and Consequences,"
in: Financial Sector Development in the Pacific Rim, East Asia Seminar on Economics, Volume 18, pages 265-309
National Bureau of Economic Research, Inc.
- HOSONO Kaoru & SAKAI Koji & TSURU Kotaro, 2007. "Consolidation of Banks in Japan: Causes and Consequences," Discussion papers 07059, Research Institute of Economy, Trade and Industry (RIETI).
- Kaoru Hosono & Koji Sakai & Kotaro Tsuru, 2007. "Consolidation of Banks in Japan: Causes and Consequences," NBER Working Papers 13399, National Bureau of Economic Research, Inc.
- Thomas F. Cargill & Michael M. Hutchison & Takatoshi Ito, 1997. "The Political Economy of Japanese Monetary Policy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262032473, December.
- Hoshi, Takeo & Ito, Takatoshi, 2004. "Financial regulation in Japan: a sixth year review of the Financial Services Agency," Journal of Financial Stability, Elsevier, vol. 1(2), pages 229-243, December.
- Arnaud Jobert & Janet Kong & Jorge A. Chan-Lau, 2004. "An Option-Based Approach to Bank Vulnerabilities in Emerging Markets," IMF Working Papers 04/33, International Monetary Fund.
- Mark M. Spiegel & Nobuyoshi Yamori, 2004. "The Evolution Of Bank Resolution Policies In Japan: Evidence From Market Equity Values," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 27(1), pages 115-132.
- Jorge A. Chan-Lau & Srobona Mitra & Li L. Ong, 2007. "Contagion Risk in the International Banking System and Implications for London As a Global Financial Center," IMF Working Papers 07/74, International Monetary Fund.
- Srobona Mitra & Elena Duggar, 2007. "External Linkages and Contagion Risk in Irish Banks," IMF Working Papers 07/44, International Monetary Fund.
- Giannetti, Mariassunta & Simonov, Andrei, 2009.
"On the Real Effects of Bank Bailouts: Micro-Evidence from Japan,"
CEPR Discussion Papers
7441, C.E.P.R. Discussion Papers.
- Mariassunta Giannetti & Andrei Simonov, 2013. "On the Real Effects of Bank Bailouts: Micro Evidence from Japan," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(1), pages 135-67, January.
- Mariassunta Giannetti & Andrei Simonov, 2009. "On the Real Effects of Bank Bailouts: Micro-Evidence from Japan," Working Papers 2009.103, Fondazione Eni Enrico Mattei.
- Harada, Kimie & Ito, Takatoshi & Takahashi, Shuhei, 2013. "Is the Distance to Default a good measure in predicting bank failures? A case study of Japanese major banks," Japan and the World Economy, Elsevier, vol. 27(C), pages 70-82.
- Chen, Sichong, 2013. "How do leverage ratios affect bank share performance during financial crises: The Japanese experience of the late 1990s," Journal of the Japanese and International Economies, Elsevier, vol. 30(C), pages 1-18.
- Saldías, Martín, 2013.
"Systemic risk analysis using forward-looking Distance-to-Default series,"
Journal of Financial Stability,
Elsevier, vol. 9(4), pages 498-517.
- Martín Saldías, 2012. "Systemic Risk Analysis using Forward-Looking Distance-to-Default Series," Working Papers w201216, Banco de Portugal, Economics and Research Department.
- Martin Saldías Zambrana, 2010. "Systemic risk analysis using forward-looking distance-to-default series," Working Paper 1005, Federal Reserve Bank of Cleveland.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.