Branch Banking and Regional Financial Markets: Evidence from Prewar Japan

Mathias Hoffmann, Tetsuji Okazaki and Toshihiro Okubo

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: In Japan in the 1920s, several financial crises and government policy led to bank mergers and the consolidation and expansion of branch networks. Using unique historical bank branch-level lending and deposit data, we show that branch banking integrated peripheral markets with the rest of the country, with large urban banks — those headquartered in Tokyo and Osaka — using deposit supply shocks in peripheral areas to fund lending elsewhere. While these findings support contemporary concerns about branch banking draining funds from peripheral markets, we argue that the export of liquidity by urban banks likely represented an efficient reallocation of credit, driven primarily by competition in funding markets. Faced with high-yielding lending opportunities in central prefectures, urban banks bid up deposit rates in peripheral areas, raising local banks’ funding costs. Local banks responded by lowering intermediation margins and reducing lending to traditional industries, which suggests that they shifted their lending to less risky and more efficient customers. We speculate that this competitive reallocation of capital across regions and sectors allowed banks to maintain a functional specialization in different customer segments, which may explain the continued coexistence of small relationship lenders and large integrated arms-length lenders in local banking markets.

Keywords: bank; branch banking; regional ï¬ nance; bank merger; economic history; Japan; internal capital markets; relationship lending; financial integration (search for similar items in EconPapers)
JEL-codes: F36 G2 N2 N9 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2025-03
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2025-16

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