Multiple Bank Relationships and the Main Bank System: Evidence from a Matched Sample of Japanese Small Firms and Main Banks

Abstract

and the workshop on Banking at University of Groningen. We are grateful to Jan P.A.M. Jacobs and the participants of the seminar and workshop for helpful comments and suggestions. This research was partially supported by a Grant-in-Aid for Scientific Research (#16330038) from the Japanese AbstractBased on a matched sample of Japanese small firms and main banks, we investigate bank-firm relationships in the early 2000s. We obtain some remarkable new findings. First, small firms have multiple bank relationships even though they have their main bank relations. Second, firms tied with financially weak main banks increase their number of bank relations to diversify liquidity risk. Third, the duration of a main bank relation has a positive effect on the number of bank relations. This is interpreted as either a reputation effect or firms' counterbalance actions against the monopoly power of main banks. To go further into this issue, we examine the effects of a main bank relation on the design of loan contracts. We find that firms with fewer bank relations tend to pledge personal guarantees to their main banks and are charged a higher interest rate. Our evidence lends support for the hypothesis of monopoly exploitation by main banks. JEL Classification Number: G21, G32

Conservative Loan Loss Allowance and Bank Lending

“…This means firms with strong ties to certain banks tend not to borrow from those banks. This result is consistent with prior literature (e.g., Ogawa et al, 2009, indicating bank-firm relations have weakened. The positive coefficient of is consistent with our prediction that banks with stronger capital tend to lend more.…”

“…The lending share ( ) is a control variable for the relation between a bank and a firm (e.g., Ogawa, Sterken, & Tokutsu, 2009;Petersen & Rajan, 1994). We expect the coefficient will be positive if firms tend to borrow from their main banks.…”

“…We expect the coefficient will be positive if firms tend to borrow from their main banks. However, there is a hold-up problem stemming from the strong bargaining power of firms' main banks (e.g., Weinstein & Yafeh, 1998), and some studies (e.g., Ogawa et al, 2009) have reported a recent weakening of these relations. Therefore, firms may borrow from other banks.…”

The effect of bank recapitalization policy on credit allocation, investment, and productivity: Evidence from a banking crisis in Japan

“…For comparison, smaller Japanese firms average three bank connections(Ogawa et al 2007). Large European firms show varied bank relationships ranging from 7 to 12, depending on the nation(Ongena and Smith 2000).…”