The governance structures of Japanese credit associations and their objective functions

ABSTRACT

Although Japanese credit associations are non-profit cooperative financial institutions, they assume the same financial functions as regional banks that are stock companies and they could compete with each other in a regional market. On the other hand, the governance structures of credit associations tend to exhibit weaker discipline than those of regional banks, and, for this reason, the financial performances of credit associations and regional banks might differ. In this article, we empirically investigated whether the objective functions of credit associations are different from those of regional banks considering their different governance structures. As a result, although significant differences of profitability of these two types of institutions were not detected, it was demonstrated that credit associations can capture a greater share of deposits than regional banks and the former are more conservative in risk taking than the latter. From these, there is a possibility that Japanese credit associations have different objective functions from regional banks.

KEYWORDS:

• Governance structures
• objective functions
• labour expenses
• credit associations
• regional banks

JEL CLASSIFICATION:

• G21
• G34

Acknowledgement

The authors would like to express their gratitude for the useful comments of anonymous referees. All remaining errors are our own.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ Hesse and Čihák (2007) revealed that in systems with a high presence of cooperative banks, weak commercial banks are less stable than they would be. Okuma (2017) concluded that cooperative financial institutions were more stable than regional banks during the Global Financial Crisis in Japan. Clark, Mare, and Radić (2018) found that competition in the loan market decreases individual cooperative bank stability, but there exists a hump-shaped relationship in Europe.

² Verbrugge and Jahera (1981), Akella and Greenbaum (1988) and Purroy and Salas (2000) analysed expense preference behaviour.

³ García-Marco and Robles-Fernández (2008) examined risk behaviour in commercial banks and savings banks in Spain.

⁴ Fonteyne (2007) mentioned that a cooperative bank might resemble a worker cooperative rather than a consumer cooperative.

⁵ See Granero and Reboredo (2005) for details.

⁶ Becchetti, Ciciretti, and Paolantonio (2016) showed that cooperative banks display higher loan ratios and lower derivatives ratios than non-cooperative banks at the world level.

⁷ Average balances are used as total assets and total net assets in the denominators.

⁸ We used cash and due from banks (Safe) as the proxy on investing in risk-free assets instead of Risk, contrary to the variable on aggressiveness of risk taking. Consequently, the coefficients of Safe take significantly positive signs at the 1% level, contrary to the coefficients of Risk. Thus, credit associations are more conservative in risk taking.

⁹ Laeven and Levine (2009) showed that the same regulation has different effects on bank risk taking depending on the bank’s corporate governance structure.

¹⁰ Yamori (1998) found that Japanese credit associations employing bureaucrat-managers held more employees than those that did not.

¹¹ Yamori, Harimaya, and Tomimura (2017a) mentioned that appointing outside directors to the board strengthens governance of Japanese credit associations. Yamori, Harimaya, and Tomimura (2017b) argued that strengthening the causal link from governance to efficiency is an important issue for Japanese credit cooperatives.

Additional information

Funding

This work is supported by JSPS KAKENHI Grant Number JP15H03366.