Cooperative Banking Efficiency in Japan

Cooperative Bank Efficiency in Japan: A Parametric Distance Function Analysis

J. Colin Glass, Donal G. McKillop, Barry Quinn & John O.S. Wilson

Abstract

This study employs an extension of the Cuesta et al. (2009) translog enhanced hyperbolic distance function model toexamine the relative performance of Japanese financial cooperatives. The modeling approach rewards financial cooperativesfor reducing undesirable outputs as well as for increasing desirable outputs and decreasing inputs. The empiricalimplementation of the model yields a rich set of results some of which contradict those found elsewhere in the literature.Our analysis finds that, Japanese financial cooperatives are subject to increasing returns to scale; they have securedsignificant levels of technical progress; they have experienced a decrease in technical inefficiency; those financialcooperatives which are larger, more diversified, with a greater proportion of their funds on loan, which have a lower returnon assets and a lower capital adequacy ratio are more efficient and; regulatory pressure to reduce ‘bad’ loans has a substantial adverse impact on output and performance.

JEL classification: G21

Keywords: Japanese Cooperative Banks; Efficiency; Regulatory compliance

Published in the European Journal of Finance 2013 . Click http://drbq.co/Pub2013 for a copy.