An Analysis of the Issue Who Monitors the Monitor: The Impact of Amakudari on Bank Performances

Banks are recognized as playing an important role of monitoring borrowers, thereby reducing the agency costs associated with informational asymmetry. However, there remains an issue "who could monitor the banks", because it is difficult for outsiders to monitor banks' management. In particular, the banks should be motivated to be prudent in their management under the comprehensive safety net. This paper investigates whether the human relationship between the regulatory authorities and private banks named as "amakudari" has been effective as a tool of prudential regulation in Japan. The amakudari is pervading in the sense that most private banks are accepting officials retired from the Ministry of Finance and/or the Bank of Japan in their top managerial and board positions. However, according to statistics in this paper, the amakudari tended to induce accepting banks to decrease their equity capital, and to extend their risk-taking. This paper concludes that the amakudari made the Japanese banking system fragile rather than being effective as a monitoring device of bank management.