An Explanation Of Main Bank Relationship In

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An Explanation Of Main Bank Relationship In Japan Essay, Research Paper First, it is necessary to define what a Japanese “main bank” is. The “main bank” is defined as the “financial group” (“kinyu keiretsu” in japanese) in the paper. “Financial group” is defined in principle by the amount of financing that a bank supplies to a particular borrowing company. When a given company has taken out the largest amount of loans from a particular bank for the past three or more years consecutively, the company is viewed as belonging to that bank’s “financial group.” Nearly all the companies listed in the first section of Tokyo Stock Exchange have a main bank. However, these companies borrow not just from their main bank, but from a large number of other banks

and financial institution as well. While the main bank is an important lender, the company must also rely on loans from the main bank’s competitors which in sum far exceed those from the main bank itself. Although the generally accepted notion among researchers in that the main bank relationship in Japan is extremely stable, this evidence suggests that the Japanese main bank is one of much more fluidity than has been generally believed. Now, the paper presents some factors that might account for the actual changing patterns of main bank affiliations. These factors are (a) the uncertainty of companies’ operating performance, assuming the main bank relationship serves an important function of risk-sharing between companies and banks, it can be derived that an increase in the

uncertainty of the business environment for a specific industry should decrease the proportion of companies that change their main bank, thus, changes in main bank affiliation will be systematically related to changes in the uncertainty of the performance of corporate borrowers; (b) the history of the main bank relationship, as the accumulated value of the main bank relationship is assumed to be positively correlated with the duration of the relationship, the longer a company has continued to maintain a main bank relationship with a specific bank, ceteris paribus, the less likely the company is to break that relationship off; this proposition concerning the changeableness of the main bank relationship is also a testable one; (c) the growth of the borrowing companies, it can be

regarded as related to main bank changes in 2 ways: first, the growth of a company raise its reputation and credibility in financial market so that the lenders don’t need to spend much information cost to confirm its credit, if the main bank relationship means economizing on information costs, we can expect those companies have achieved relatively rapid growth to show more tendencies to leave main bank relationships that those that have been stagnant; second, rapidly growing companies will tend to switch their main bank relationships to large banks as it’s easy to accommodate their customer’s expanding demands for diversified financial services.and (d) the “leading bank” factor, since the leading banks have capability of supplying a larger variety of services, including

financial services overseas, they tend to increase their shares in main bank relationships. There is a type of contingency claim between banks and the borrowing companies which are in their financial groups. Namely, the lending rate remains relatively low when the market rate rises, and the rate stays relatively high when the market rate fails. Through this sort of contract, the borrowers are able to some extent to avoid the risk of movements in the market interest rate. There is another study supports the hypothesis that in the Japanese bank loan market, banks and firms share risks through loan contract arrangement. They even say that some part of the loan interest rate rigidity in Japan can be explained by the implicit contracts between banks and borrowing companies. However,