An Explanation Of Main Bank Relationship In Japan

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Term Paper Title	An Explanation Of Main Bank Relationship In Japan
# of Words	1144
# of Pages (250 words per page double spaced)	4.58

An explanation of Main Bank relationship in Japan

[Category]:

Business

[Paper Title]:

An explanation of Main Bank relationship in Japan

[Text]:

This paper investigates whether there has been risk-sharing between banks and
borrowing companies through the main bank relationship in Japan. The paper will
discuss, if the main bank relationship is based upon a mechanism of
risk-sharing, changes in the relationship ought to be systematically related to
changes in the risk that borrowing companies face. And also, it will discuss the
importance of the main bank relationship as a means of risk-sharing by comparing
the correlation between financial expenses and the operating profits of specific
companies with the degree of their dependence on main banks.

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 ...

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