Utilization of Soft Information on Bank Performance: The Roles of Relationship Lending in Competitive Local Markets

119 Pages·2019·1.931 MB·English

by  Tadanori Yosano, Takayoshi Nakaoka

SPRINGER BRIEFS IN ECONOMICS
DEVELOPMENT BANK OF JAPAN RESEARCH SERIES
Tadanori Yosano
Takayoshi Nakaoka
Utilization of Soft
Information on
Bank Performance
The Roles of
Relationship Lending
in Competitive Local
Markets
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Tadanori Yosano Takayoshi Nakaoka
(cid:129)
Utilization of Soft
Information on Bank
Performance
The Roles of Relationship Lending
in Competitive Local Markets
123
Tadanori Yosano Takayoshi Nakaoka
Kobe University KindaiUniversity
Kobe,Hyogo,Japan Osaka,Japan
Research Institute of Capital Formation Research Institute of Capital Formation
Development Bankof Japan Development Bankof Japan
Chiyoda-ku, Tokyo,Japan Chiyoda-ku, Tokyo,Japan
ISSN 2191-5504 ISSN 2191-5512 (electronic)
SpringerBriefs inEconomics
ISSN 2367-0967 ISSN 2367-0975 (electronic)
Development Bankof JapanResearch Series
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Preface
Thisbookexplorestheeffectsofsoftinformationutilizationinthedecisionprocess
for lenders, especially concerning small and medium-sized enterprises (SMEs) in
regionalmarkets.Thisstudyisoneofthefirststudiesthatusequestionnairesurvey
data from lender representatives, analyzes the relationship between the financial
metrics of a lender’s performance and soft information factors, and further applies
this analysis to interbank completion. The authors’ empirical results suggest that
utilizing soft information allows lenders to attain a more precise lending decision.
The Financial Services Agency in Japan introduced an action program in 2003
that requires regional banks to shift from transaction-based lending to relationship
lending.Against that background,this book examines theinfluence ofrelationship
lending on a lender’s performance. This study found that relationship lending
allowslenderstochargeahigherpremiumtocounteractthehighriskinvolvedwith
SMEs. This book also examines how relationship lending affects lending perfor-
mance in interbank competition. The conclusion is that, even though interbank
competition has negative effects, a bank in a competitive local market can acquire
an informational advantage to limit its own loss.
Thisbook specificallyconducts afactoranalysisusing thesurvey questionnaire
data to categorize questionnaire items into three soft information factors: organi-
zationalsystems,networksoralliances/partnerships,andbusinessandmanagement
leadership. The authors’ findings suggest that information production, especially
networkandbusiness/leadershipinformation,playsanessentialroleinpromotinga
bank’s profitability. These effects are strong even when banks face high interbank
competition. Relationship lending not only improves bankers’ lending techniques,
butalsoencouragesintimatepersonalinteractionsandfurtherfostersandenhances
theircommunityknowledge—whichenablethemtosurviveinahighlycompetitive
market.
v
vi Preface
These findings will be useful to scholars and policymakers in the field of rela-
tionship lending, especially against the backdrop of advances in intelligent infor-
mation technologies.
Kobe, Japan Tadanori Yosano
Osaka, Japan Takayoshi Nakaoka
Acknowledgements
We would like to thank Kamon Iwatsubo, Nobuyoshi Yamori, Kazuo Ogawa,
Yoshiaki Ogura, Hirofumi Uchida, Hans Degryse, and Steven Ongena for their
helpful comments. We are also grateful to the participants of 2010 Barcelona
BankingSummerSchool,5thAppliedEconometricsConferenceatOsakaUniversity,
and 2010 FMA meeting and, particularly, Klaus Schaeck, Gregory F. Udell, and
AllenN.Berger.Weappreciatetheirvaluablecommentsandsuggestions.Anyerrors
are our own. This research was financially supported by a grant-in-aid from the
ZenginFoundationforStudiesonEconomicsandFinance.
vii
Contents
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 The Bank–Firm Relationship in Japan . . . . . . . . . . . . . . . . . . . . . 1
1.2 Enhancing Functions of Relationship Lending in Japan Since
the Early 2000s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.3 Soft and Hard Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.4 Centralized and Decentralized Organizations . . . . . . . . . . . . . . . . 9
1.5 Small, Medium-Sized, and Large Enterprises . . . . . . . . . . . . . . . . 10
1.6 Lending Technologies for SMEs: Transactional
and Relationship Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.7 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1.8 Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2 Theory and Hypotheses: The Effects of Using Soft Information
on a Lender’s Performance, Specifically in Interbank
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.1 Informational Asymmetry and Lock-In . . . . . . . . . . . . . . . . . . . . 17
2.2 Interbank Competition, the Shift to Relationship Lending,
and Relationship Lending’s Effect on Profitability . . . . . . . . . . . . 20
2.3 The Informational Advantage of Relationship-Based Lending
and Regional Banks’ Credit Analysis Skills . . . . . . . . . . . . . . . . . 23
2.4 Interbank Competition’s Effect on Loan Risk. . . . . . . . . . . . . . . . 24
2.5 Interbank Competitions and the Effect of Relationship Lending
on Bad Loan Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
3 Survey Data from Japanese Regional Banks and Using
Soft Information in Lending Decisions . . . . . . . . . . . . . . . . . . . . . . . 31
3.1 Characteristics of Japanese Banks . . . . . . . . . . . . . . . . . . . . . . . . 31
ix
x Contents
3.2 Survey Description and a Data Sample . . . . . . . . . . . . . . . . . . . . 34
3.3 Using Soft Information in Lending Decision Processes. . . . . . . . . 38
3.4 A Factor Analysis for Soft Information and Our Sample’s
Descriptive Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
3.5 Univariate Tests: The Relationship Between Soft Information
Factor Scores and a Bank’s Performance . . . . . . . . . . . . . . . . . . . 42
3.6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Appendix 3.1: Survey Questionnaire Items (Conducted by SME
Support, Japan). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Appendix 3.2: The Underlying Factors in the Factor Analysis. . . . . . . . 52
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
4 The Influence of Using Soft Information on Lender Performance
in Competitive Local Markets: An Empirical Analysis. . . . . . . . . . . 57
4.1 Multivariate Regression Models. . . . . . . . . . . . . . . . . . . . . . . . . . 57
4.2 Dependent and Explanatory Variables . . . . . . . . . . . . . . . . . . . . . 59
4.2.1 Soft Information Factors . . . . . . . . . . . . . . . . . . . . . . . . . 59
4.2.2 Loan Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
4.2.3 Bank-Specific and Local Market-Specific Variables . . . . . . 63
4.3 Regression Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
4.3.1 Multivariate Analysis of Loan Profitability . . . . . . . . . . . . 65
4.3.2 Multivariate Analysis of the Bad Loan Ratio. . . . . . . . . . . 74
4.4 Robustness Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
4.4.1 F-Test. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
4.4.2 Assessment of the Factor Scores’ Validity. . . . . . . . . . . . . 82
4.4.3 Random Effects GLS Regressions. . . . . . . . . . . . . . . . . . . 83
4.5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Appendix 4.1: Interbank Competition and Loan Performance . . . . . . . . 89
Appendix 4.2: Interbank Competition and the Non-performing
Loan Ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
5 Soft Information’s Role in Lending Decisions. . . . . . . . . . . . . . . . . . 93
5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
5.2 Soft Information’s Effects on Loan Profitability . . . . . . . . . . . . . . 94
5.3 Soft Information’s Role in Lending Decisions . . . . . . . . . . . . . . . 95
5.4 Three Latent Factors and Information Efficacy . . . . . . . . . . . . . . . 96
5.4.1 Business and Management Leadership . . . . . . . . . . . . . . . 96
5.4.2 Networks or Alliances/Partnerships. . . . . . . . . . . . . . . . . . 99
5.4.3 Organizational Systems . . . . . . . . . . . . . . . . . . . . . . . . . . 101
5.5 Concluding Remarks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Index .... .... .... .... .... ..... .... .... .... .... .... ..... .... 107