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The Fall of "Organ Bank" Relationships During the Wave of Bank Failures and Consolidations: Experience in Pre-war Japan

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Author Info
Tetsuji Okazaki (Faculty of Economics, University of Tokyo)
Michiru Sawada (Faculty of Economics, Nagoya Gakuin University)
Ke Wang (Faculty of Economics, University of Tokyo)

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Abstract

This paper examines how the close ties between banks and non-banking firms-the so-called "organ bank" relationship in Japanese banking literature-declined through bank failures and banking consolidations in pre-war Japan. With a unique dataset compiled from 1,007 Japanese banks that were doing business between 1926 and 1936, we measure the degree of the "organ bank" relationship by the number of people who worked as directors or auditors for both a bank and a non-banking firm at the same time. We found that the number of "interlocking directors" declined in our sample period, when there were many bank failures and bank mergers and acquisitions. Furthermore, the remaining interlocked directors, after the wave of bank failures and consolidations, no longer demonstrated negative effects on the performance of the banks, as measured by their profitability. Our findings suggest, based on experience in Japan, that banking consolidations and selection through failure may help eliminate the detrimental connections between banks and non-banking firms.

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Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-379.

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Length: 42 pages
Date of creation: Oct 2005
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Handle: RePEc:tky:fseres:2005cf379

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  5. El?d Takáts, 2004. "Banking consolidation and small business lending," Working Paper Series 407, European Central Bank. [Downloadable!]
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  7. D. McFadden & J. Hausman, 1981. "Specification Tests for the Multinominal Logit Model," Working papers 292, Massachusetts Institute of Technology (MIT), Department of Economics.
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  8. Focarelli, Dario & Panetta, Fabio & Salleo, Carmelo, 2002. "Why Do Banks Merge?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(4), pages 1047-66, November.
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  10. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March. [Downloadable!] (restricted)
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