Did Mergers Help Japanese Mega-Banks Avoid Failure? Analysis of the Distance to Default of Banks / Kimie Harada, Takatoshi Ito.

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Harada, Kimie

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w14518.Publication details: Cambridge, Mass. National Bureau of Economic Research 2008.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: In the late 1990s, several large Japanese banks failed for the first time in its postwar history. As the financial environment was deteriorating further, several remaining banks decided to merge among themselves, presumably, to make their operations more efficient to avoid failures. This paper defines, calculates and analyzes the distance to default (DD), a concept of credit risk in corporate finance, of Japanese large banks. The DD helps us to answer a question whether mergers in the late 1990s and 2000s made the merged banks financially more robust as intended. The novelty of the paper is to develop a method of analyzing the DD for banks that experience a merger, and to apply the method to the Japanese banking data. Our findings include: (1) A merged bank fundamentally inherits financial soundness of pre-merged banks, without adding special value from the merger. A merger of sound (unsound) banks produced a sound (unsound, respectively) merged financial institution; and (2) In some cases, a merged bank experienced a negative DD right after the merger. The findings are consistent with a view that a primary objective of a merger was to take advantage of the perceived too-big-to-fail policy, rather than to pursue a radical reform. Another interpretation is that mergers with intention of enhancing efficiency resulted in failed implementation of true operational efficiency, such as quick integration of computer operation systems and elimination of duplicating branches.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w14518 (Browse shelf(Opens below))	Not For Loan

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December 2008.

In the late 1990s, several large Japanese banks failed for the first time in its postwar history. As the financial environment was deteriorating further, several remaining banks decided to merge among themselves, presumably, to make their operations more efficient to avoid failures. This paper defines, calculates and analyzes the distance to default (DD), a concept of credit risk in corporate finance, of Japanese large banks. The DD helps us to answer a question whether mergers in the late 1990s and 2000s made the merged banks financially more robust as intended. The novelty of the paper is to develop a method of analyzing the DD for banks that experience a merger, and to apply the method to the Japanese banking data. Our findings include: (1) A merged bank fundamentally inherits financial soundness of pre-merged banks, without adding special value from the merger. A merger of sound (unsound) banks produced a sound (unsound, respectively) merged financial institution; and (2) In some cases, a merged bank experienced a negative DD right after the merger. The findings are consistent with a view that a primary objective of a merger was to take advantage of the perceived too-big-to-fail policy, rather than to pursue a radical reform. Another interpretation is that mergers with intention of enhancing efficiency resulted in failed implementation of true operational efficiency, such as quick integration of computer operation systems and elimination of duplicating branches.