Our paper “Branch banking and regional financial markets: evidence from prewar Japan” with Okubo Toshihiro (Keio University) and Okazaki Tetsuji (Meiji Gakuin University)is now published as open access article in the Financial History Review.
In the paper we examine how the expansion of branch banking in peripheral Japanese prefectures in the interwar period helped integrate financial markets during this formative period in which the structure of modern Japan’s banking market was shaped. Through their branch networks, large, urban banks from the major centers (mainly Tokyo, Osaka) did not primarily compete with incumbent local banks in their respective local lending markets. Rather, urban banks exported deposits from low-growth peripheral areas to high-growth prefectures in the center. This bid up deposit rates for incumbent local banks, forcing these to tighten their lending standards to traditional industries. Our results highlight how competition for funds enables an ultimately efficient reallocation of capital while preserving a functionally separated banking system in which local banks engage in relationship based lending to small firms while larger banks lend to larger firms countrywide.