Bank Integration and Local Credit Cycle:Evidence from Japan

This paper investigates how the integration of local banking markets affects the credit and economic cycle of local economies by using both a data set on the branch network of nationwide city banks and a prefecture-level panel data set on the formation and collapse of the real estate bubble in Japan. The empirical results show that the presence of city banks does not seem to have lessened the effects of local financial shocks on local economies. On the contrary, we find evidence that nation-wide city banks aggressively transmitted financial shocks that originated from major cities to local peripheral economies. These results suggest a dark side of large nation-wide banks: they can be a source of financial and economic volatility when they elect to take concentrated risk and spread out the impacts of large financial shocks to peripheral economies.