Are Banks Affiliated with Bank Holding Companies More Efficient Than Independent Banks? The Recent Experience Regarding Japanese Regional BHCs

Few studies have investigated whether Japanese banks affiliated with bank holding companies are more efficient and profitable than independent banks. The present paper tests this hypothesis by using both a stochastic frontier approach and a market valuation approach. First, our results suggest that banks affiliated with bank holding companies are not more cost-efficient than are independent banks. Because of the brief history of Japanese BHCs, it is fair to conclude that the formation of regional bank holding companies has not achieved efficiency gains so far. Second, we find that banks affiliated with bank holding companies are more profit-efficient than are independent banks. This is particularly apparent when the establishment of the bank holding companies increases market power in regional markets. This supports the Financial Services Agency’s policy to increase the profitability of regional banks through bank consolidation. Finally, based on standard event study methodology, we find that the market did not regard news about the establishment of bank holding companies as significant events.